"What Is The Magic Number?": Wall Street Answers The Most Important Question For Investors Today

In its latest Fund Manager Survey, Bank of America asked what may be the most important questions for investors today: "What level of US 10y Treasury yields would cause you to rotate from equities into bonds?"

That level, which Bank of America's Michael Hartnett has repeatedly dubbed the "magic number", rose from 3.5% last month to 3.6% in the May survey, and represents that weighted mid-point of the responses by the 223 survey participants, who manage a total of $643BN .

As a reminder, last week Hartnett explained why he agrees with the FMS response, saying "it should not be a surprise if reallocation starts before yields get to 3.5%. Indeed, as we breached 3% the following asset classes all suggested that the 3-3.5% range would become “painful” if not accompanied by much stronger economic data."  As the BofA CIO further added, banks, homebuilding stocks, US dollar, EM, yield curve all suggested 3% on the 10-year Treasury yield was the "magic number."

  • Lower US bank stocks: rise in rates was shifting from a “good” rise to a “bad” rise (financials underperformed utilities by 1250bps since mid-March)

  • Lower US homebuilding stocks: a good lead indicator of interest rates, homebuilding stocks are saying the Fed is making a “policy mistake”

Then, yesterday, as 10Y yields broke out to fresh post-Taper Tantrum highs, rising above 3.05% and as high as 3.09%, a level not seen since 2011, Bill Gross tweeted that "the Economy can't support yields higher than 3.25% for 30s and 10s, nor 3% for 5s. Continuing hibernating bond bear market is best forecast."

And, as we also showed yesterday, demonstrating the recent sharp drop in loan demand across the board as a result of higher rates despite far easier lending conditions, and affecting everything from C&I loans...

... to residential mortgages...

... to consumer loans...

... Gross is right, only the Fed hasn't quite realized yet that US interest rates are now at a level that leads to not only lack of loan growth, but outright deleveraging, loan destruction and thus, deflation.

To underscore his point, Gross also noted the technicals and said that "30yr Tsy long-term downward yield trendline for the past 3 decades now at  3.22%, only ~4bps higher than today's yield." Asking rhetorically, "will 3.22% be broken to upside?" his answer was no.

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