Société Générale Publishes Math Implying A 70% Crash If Bond Yields Hit 5%

The following chart is taken from Société Générale's research into the sensitivity of US equities to a higher interest rate environment. Specifically, with respect to the rate on US government treasuries.

So just take that onboard for a moment.... the implication here is that equity markets are nowhere near ready for interest rate normalisation and, on the contrary, are very sensitive to this.

One of the main reasons of course is that bonds are seen as safer than equities and if bonds start paying above-inflation returns again (or even delivering decent profits again) then bonds will become a primary competitor to the stock market and investors will start selling their stocks to buy bonds.

As interest rates rise, bonds are making a huge comeback. In fact the flagship US 10 Year Treasury yield recently broke a long-term downward channel - exceeding the 3% mark.

According to the Société Générale paper, a 3% bond yield correlates to a possible 22% crash.

What's interesting about their paper is that the severity of an equity crash increases by 7% for every unit of 0.25% gained by rising bond yields.

We can thus extrapolate upwards from there.

And thus a 5% bond yield equates to a possible 78% correction in the US equity markets.

Even more interestingly, a 78% collapse would seem to take us right back to the traditional support point of the S&P500

Coincidence? Decide for yourself.

However we can use this as a guide for how to prep shorts against US equities.

For instance, by using the applicable 10 Year Treasury rate at any given time, we can judge how deep we should prepare our speculative attacks upon equities to go.

As we're at roughly 3.1% as of today, then if there was a serious stock collapse, then this would translate to around a 20-30% writedown in prices according to the math here.

And of course the writedown severity rises in line with bond yields on the Flagship 10y Treasury (which of course means the rest of the market is rising with it).

Now interestingly, a recent forecast by JP Morgan head honcho, Jaime Dimon, says that he would not be surprised to see a 5% treasury yield in the near future.

https://www.cnbc.com/2018/08/06/jp-morgans-jamie-dimon-cautions-10-year-treasury-note-rate-to-hit-5-percent.html

So factor all this in, and make your own mind up on where we're going with the bond market, and in turn the downside present in the US equity market.

I do consider however that using Société Générale's math to target the bottom of any speculative attacks against equities in the near future has a lot going for it. So watch the markets as yields rise in line with the Federal Reserve's hiking of interest rates and use the table to target any potential shorts against US equities.