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Bond vigilantes awaken counterparts in the stock market

From Reuters - February 11, 2018

NEW YORK (Reuters) - Bond vigilantes could be finding allies in the stock market.

With inflation fears back in vogue and the U.S. budget deficit seen ballooning, vigilantes have stormed fixed income trading floors and seem to be cropping up in equity markets too, where they may punish already battered stocks for policymakers and lawmakers actions.

The stock market is feeling the bond markets pain. Absolutely, no doubt - we have stock vigilantes too, Ed Yardeni, the longtime Wall Street strategist now president at his namesake research firm, told Reuters.

The term bond vigilante was coined by Yardeni in 1983 to describe investors insistence on high yields to compensate for the risk of inflation and budget deficits during the Reagan administration. A stock version of a vigilante would seek to influence lawmakers and policymakers by slamming equity prices.

Bond yields began to soar on Feb. 2 after U.S. government data showed the biggest wage gains since 2009, convincing investors of the growing threat of inflation, long tame since the 2007-2009 recession.

Stock vigilantes could make their own demands of policymakers.

Under vigilante logic, if rates are higher, if inflationary pressures are running hot, if the economy is nearing its long-run potential and the Federal Reserve really is going to raise rates quickly in response, then the value of stocks needs to be lower too. Potentially a lot lower.

Over the last half a dozen of years we have been saying equity valuations can be higher because we are living in a low interest rate and low inflation environment, but thats reversing a little bit and thats what we are staring at now, said Art Hogan, chief market strategies at Wunderlich Securities.

Stocks have been falling apart in recent days, with the S&P 500 .SPX down 11 percent from a high hit just two weeks ago. But the switchback comes amid a long bull market, during which equities had ignored until recently the stealthy run-up in 10-year Treasury yields US10YT=RR from 1.32 percent in 2016 to this year's 2.89 percent high.

U.S. stock investors have now turned hypersensitive to rising yields after the past weeks surge, which lifts borrowing costs and could curb economic earnings and growth, Yardeni said. That also comes against the backdrop of accumulating government debt.

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