What happens when the 2-year yield surges on a CPI day

Key points:

• The BLS released the January Consumer Price Index data on Thursday
• The 2-year Treasury note yield increased by 22 basis points 
• Stocks show slightly negative to flat returns in a rising rate environment in the near term

What happens when the 2-year yield surges on a CPI release day

Let's conduct a study to assess the outlook for stocks and bonds when the 2-year treasury note yield increases by 15 basis points or more on a CPI release day. To assess more historical instances, I lowered the threshold from 22 to 15 bps. If I used a similar increase to the level achieved on Thursday, the study would show only 1 other example. That signal occurred in 1983.

The 22 basis point increase in the 2-year yield represents the most significant 1-day net change since June 2009. When I include the CPI date condition, we see that this is the first 15 bps or more increase on a CPI day since October 2003.

Similar CPI yield surges show slightly weak returns for the S&P 500

This signal has triggered 14 other times over the past 41 years. After the others, the S&P 500 shows slightly weak returns and unfavorable win rates across most short and medium-term time frames. However, the 1-year win rate and return suggest that similar increases in the 2-year yield do not foreshadow the end of the equity bull market. 

Similar CPI yield surges show the 2-year yield can rise even further in the near term

The short to medium-term time frames suggest the 2-year yield can continue to increase, especially in the 2-week window. The table also shows higher rates at some point in time over the next 6 months in 13 out of 14 instances.

Similar CPI yield surges show the 10-year yield can rise even further in the near term

The 1-4 week time frames suggest the 10-year yield can continue to increase, especially in the 4-week window. As was the case with the 2-year, the table shows longer duration yields increased at some point in time over the next 6 months in 13 out of 14 instances.

Similar CPI yield surges show the yield curve can continue to flatten

Except for the 1-week time frame, the CPI yield surge suggests the 2/10's yield curve can continue to flatten.

Sectors and factors confirm the broad market message

When we examine sectors and factors, the return patterns look similar to the S&P 500. One might expect soft results in the near term but significantly better days ahead, especially a year from now. 

What the research tells us...

When the 2-year treasury yield increases by 15 bps or more on a CPI day, stocks struggle, and bond yields increase in the near term. However, the adjustment to higher rates is relatively short-lived as equities show significantly better results a year later. We should also be mindful of further flattening in the 2/10's yield curve from an already low spread of 44 bps.

In a note on Wednesday, I shared a study that shows what happens when the 2-year yield increases for 7 consecutive weeks. Today's note provides additional evidence that confirms an environment where stocks struggle in the near term as the market adjusts to the new reality of higher interest rates.