Bullish stock-market investors didn't sweat a Tuesday selloff in Treasurys that took the 10-year yield to its highest level since March. And a further rise in yields could give equities an even bigger boost, said investor Bill Miller.
In a CNBC interview Tuesday, the founder of Miller Value Partners argued that a break above 2.6% for the 10-year yield could set off a “melt-up” in stocks that would rival the 2013 ramp-up.
“Those 10-year yields go through 2.6% and head towards 3%, I think we could have the kind of a melt-up we had in 2013, where we had the market go up 30%,” Miller said. In 2013, investors began to lose money in bonds, prompting them to take money out of bond funds and put it into equity funds, he said. Yields rise as Treasury prices fall.
The yield on the 10-year Treasury note rose 6.2 basis points Tuesday to 2.542%, its highest since mid-March.
Miller, while at Legg Mason, put together a 15-year streak in which he beat the S&P 500. Performance turned sour during the financial crisis on bets the financial and housing sectors were too beaten down.
Stocks have started 2018 with a bang, building on a 2017 rally attributed to improving corporate earnings and global economic growth. In December, President Donald Trump signed a massive tax bill that slashed corporate rates into law.
The S&P 500, Dow industrials and Nasdaq Composite closed at records Tuesday. The S&P 500 and Nasdaq have closed at records every trading session of 2018. For the S&P, that matches a record to begin the year that’s stood since 1964.
Some investors have been warning of a melt-up — a move in which an asset rallies sharply as investors fearful of missing out on the rise stampede into the market — since last year.
Value investor Jeremy Grantham last week warned that investors should be prepared for the possibility of a melt-up that would confirm stocks are in a “classic bubble,” leading the way to a potentially ugly selloff.
Miller told CNBC that stocks could get an added boost from the cut in the corporate tax rate from 35% to 21%, saying the reduction is probably only partly priced into the market.