The bond market is in charge now and behaving 'almost like a meme stock,' equity strategist says

• The bond market is in charge and reacting like a meme stock, an equity strategist told Bloomberg TV.
• The comment came as US Treasury yields have seen big swings in recent weeks.
• "The Fed has obviously set itself up for a bit of a tête-à-tête with the bond market."

Stocks are taking cues from bonds as the sharp drop in yields over the last two months has ignited a rally in the S&P 500 and Nasdaq.

In fact, US Treasury yields have seen big day-to-day swings recently, and it says something about the state of the market, according to Richard Kneller, US equities desk strategist at Stifel.

"The bond market is in charge, as far as I'm concerned," he told Bloomberg TV on Thursday. "I mean, the bond market is reacting almost like a meme stock."

Meme stocks boomed in 2021, when communities of retail investors organized on social media platforms like Reddit to send GameStop, AMC, and others soaring. 

For its part, the bond market has witnessed sudden spikes and plunges in recent months as investors react to prospects for Federal Reserve policy.

In particular, fresh data on inflation have changed the odds on Fed rate hikes or cuts, putting yields in motion. In addition, strong or weak demand in recent Treasury auctions has also swung yields wildly.

"The equity market is going to take the cue from the bond market, which of course is now thinking that it's taken the reins in some respects from the Fed," Kneller said. "The Fed has obviously set itself up for a bit of a tête-à-tête with the bond market."

Guesses about when and how many times the Fed will cut rates next year vary by a lot. From four, to five, to six, bets lie across a very broad spectrum.

Wall Street's optimism could clash with the Fed, as its own projections for 2024, which came out on December 13, signaled three cuts next year.

"We have the Powell pivot on the 13th and the market now thinks you're going to get five or six rate cuts," Kneller added. "Powell suggested there could perhaps be three. But the Fed and the central banks are still very data dependent. And it's not a given in my mind that you're going to get three, never mind six."