In the latest Fund Managers’ Survey release by Bank of America this week, there was an overarching agreement on what Wall Street’s “smart money” believes will be the biggest drive of equity prices in the next 6 months. The answer, as shown in the chart below, is Treasury Bond Yields…

… and not just any bond yields, but – as per the Fed model which has reigned supreme in recent years – rising bond yields, which suggests that as a result of a rising risk premium, stock prices would slide And in a time when even central bankers are increasingly agitating for a “gentle” increase in long-term rates, we can see why the so-called smart money is concerned that upcoming moves in yields could disrupt the stock market’s bull market. After all, as we reported cautioned last week, even Ray Dalio warned that a yield rise as small as 1% could lead to trillions in MTM losses.

Curiously, even one of the biggest deflationistas, the man who coined the “Ice Age” thesis, SocGen’s Albert Edwards is concerned. As he points out in his latest piece which asks “Has the bull market in government bonds finally ended“, “as government bond yields snap sharply higher, many investors are concerned that the 35-year bond bull market is finally over. All investors, bond and equity alike, have benefited from this stunningly positive investment backdrop. This long bull market has often seen occasional cyclical rises in yields, but some feel this time it’s different. A change in the wind is being felt as governments listen to the central banks’ recent call for fiscal, rather than monetary policy, to do the heavy policy lifting from hereon in. Is the long bull market in bonds now over.”

As he further notes:

“The recent bond sell-off has indeed been savage. Japanese, UK and US 30-year bonds have lost 12%, 11% and 8% respectively since yields bottomed in Q3. But why are investors any more nervous about this bond market sell-off, savage though it has been, than any other selloff over the past 35 years? Japan has been the trailblazer in the long bull market, starting a full decade before the west and we have seen savage cyclical spikes in yields during this time (eg from 0.8% to 2.2% in late 1998, and more recently in late 2010 yields spiked from 0.8% to 1.3%. That did not stop the descent to negative yields, where 10y yields still remain.”