Despite the powerful rally over the last several weeks that brought the US equity markets back to their all-time highs, treasury yields are up only slightly and are well below mid-September levels.
Meanwhile, speculators are still carrying a hefty short position in 10-year treasury futures and options contracts, implying that yields have further to fall yet. Speculators are currently short about 160,000 contracts. Over the last several years, significant lows in yields have not been achieved until speculators became net long about 100,000 contracts, implying a 260,000 long contract delta that would need to be filled to achieve a low in yields (1st chart below). Simply put, if history is a guide we are going to have to observe a massive change in positioning before yields make a low.
What does this mean for stocks? The second chart below overlays the 10-year treasury yield over the relative performance of counter cycle stocks to cyclical stocks. As yields fall, counter cyclical stocks tend to outperform cyclical stocks and vice versa. Thus, if yields continue to fall we are likely in for more of the same dynamic we've seen all year, which is counter cyclical leadership in the stock market.