Sell in May and go away is a phrase often quoted by investment managers, the merits of doing so over the years have given mixed results. The first full week of trading in May 2015 has so far failed to follow through on what was a decent close to US markets on Friday. Equities appear to have taken time to react to the recent sell off in bond markets. 10 year US treasury yields have risen, and are now back to levels last seen at the start of March (2.2%), from recent lows of 1.8%. A similar spike in yields in late January and early February brought a correction in the S&P 500 of about 5%. Government yields across the board have risen in the past weeks; 10-year UK gilts are now yielding close to 2%. We pointed out in our weekly report the move in German Bunds. The ten-year bund yield has now climbed to 60bp.
The S&P 500 closed on Tuesday on its 50 day moving average; as we mentioned earlier 10-year treasury yields have reached the top end of the trading range we saw earlier in the year. From a technical point of view both of these points may become significant. If yields rise through the previous peak, the S&P 500 is unlikely to hold this level.
Rising yields are generally considered to be positive for equities, as it's a sign of an improving economy, however the rise needs to be gradual. Equity investors will now be paying much closer attention to the moves in bond prices. Gilt yields on Wednesday stabilised ahead of today’s polling day, as did the FTSE 100. Yields on the 10 year US treasury rose modestly again on Wednesday, US equities continued to drift lower. Analysts put this latest move to comments on equity valuations from Fed Chair Janet Yellen at the Finance and Society Conference. She went onto highlight the risks of a spike in long-term rates when the Federal Reserve starts to normalise its interest rate policy, impacting financial markets.
As we enter polling day, the hot money appears to be moving in the direction of a repeat of the past five years, if the bookmakers are anything to go by. At the start of the week the Conservatives were the favourites to win the most seats, and that remains the case. However Ed Miliband was the bookies favourite to be the next prime minister. As Wednesday has worn on the odds on a Conservative led coalition have shortened and is now neck and neck with the Labour party.