The Wall Street legend who called the 2008 housing collapse a key bond market level could pressure US equities into another sell-off.
In a new episode of the Real Eisman Playbook, Steve Eisman says surging oil prices and higher interest rates are creating a difficult environment for the S&P 500.
According to Eisman, oil threatening to jump back above $100 could trigger renewed inflation fears.
“Oil prices jumped above $100 [in Q1], and that created fear that inflation was just around the corner.”
Eisman highlights that during times of geopolitical tensions, investors tend to flock to the safety of US Treasuries as a hedge against inflation. But Eisman says this time may be different, as yields on long-dated bonds are soaring, indicating that investors are likely demanding higher interest rates to protect their capital against rising oil prices and inflation.
“Now normally, in times of stress, investors buy Treasuries, but not this time. The 10-year got as high as 4.4%. The combination of higher oil prices and increasing interest rates was just too much.”
According to Eisman, history has shown that investors tend to sell equities if the 10-year Treasury yield spikes to 4.5%.
“One more point about the relationship between interest rates and the equity markets. Over the last four years, 4.5 % on the 10-year has proven to be an important boundary for equity performance. Once the 10 -year breaches 4.5%, the market tends to sell off. We got close. So if the war lasts much longer and oil prices climb further, that barrier could be breached.”
Eisman appears to be saying that at a 4.5% yield, Treasuries become much more attractive than stocks, which come with more volatility and uncertainty.
The US 10-Year yield (US10Y) is currently hovering at 4.35%. Meanwhile, the S&P 500 is trading at 6,816 as of Friday’s close.
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