SIT Investment Associates’ Bryce Doty sees higher rates creating dangerous headwinds for stocks.
Doty believes investors are in "denial" over how high rates could go this year and the painful impact it could have on stocks, CNBC reported.
"We didn't pierce 3 percent this time, but the next 10-Year auction in a couple of weeks is probably certain to do that," he recently told CNBC's "Futures Now." "I think it's going to just keep going. 10, 20 basis points a month gets you to 4 percent in a hurry," he said.
He warns that the stock market could plunge once again amid the volatile Treasury bond moves.
"Typically, the stock market has sold off and has created a flight to quality and has driven yields down," he added.
"Everything has changed. You now have the stock market reacting to an uptick in yields and bonds rather than the other way around," Doty stated. "So, I think it's going to take investors a while to re-calibrate that reality," he said.
Doty, a senior portfolio manager at Sit, runs the RISE ETF, which is designed to profit from rising rates. His strategy right now is to short bond futures in order to "turn the fear into cheap insurance," CNBC explained.
Doty calls the environment "surreal" as debt issuance builds to cover exploding budget deficits, sparked by a combination of higher spending and new tax cuts that some analysts warn could make the problem worse.
"It's dangerous at worse, and uncertain at best," he said.
Other market experts are preditcing even gloomier scenarios for the economy.
Goldman Sachs Group Inc. warns that if the 10-year U.S. Treasury yield hits 4.5 percent by year-end, the economy would probably muddle through -- stocks, not so much.
Goldman’s base-case scenario calls for a 10-year yield of 3.25 percent by the end of 2018, though a “stress test” out to 4.5 percent indicates such a move would cause stocks to tumble, economist Daan Struyven wrote in a note Saturday.
He also said the economy would probably suffer a sharp slowdown but not a recession, Bloomberg reported.
“A rise in rates to 4.5 percent by year-end would cause a 20 percent to 25 percent decline in equity prices,” the note said.
While a recent drop in stocks may have been fueled by concerns tied to the 10-year yield approaching 3 percent, many strategists have said they felt equities could continue to rise until reaching 3.5 percent or 4 percent.
A 20 percent to 25 percent drop in stocks, as measured from the S&P 500’s Jan. 26 peak close of 2,872.87, would take the gauge to a range of approximately 2,155-2,298. It closed on Friday at 2,747.30 after dropping as low as 2,581 on Feb. 8 at the apex of the recent volatility-fueled meltdown. If this scenario did play out with Goldman’s numbers, stocks would have a long way further down to go.
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