Jump to content

10 Year US Treasury Yield Moving Higher


Recommended Posts

Is anyone watching the move in the 10 year US treasury? Since bottoming at about 0.5% in August it has been steadily moving higher and is at 1.29% today. Quite the move. And the move higher has been very methodical/consistent. Almost under the radar and stealth like :-) Chug, chug, chug.

 

As vaccinations continue and the economy opens up we should see a big increase in GDP growth in Q2. Inflation expectations are also moving higher.

 

Makes sense to me the 10 year yield will move higher from current levels; just not sure how much higher and how fast.

 

At what point does a rising 10 year bond yield become a problem for the stock market? 1.5%? 1.75%? 2%?

Link to post
Share on other sites

Is anyone watching the move in the 10 year US treasury? Since bottoming at about 0.5% in August it has been steadily moving higher and is at 1.29% today. Quite the move. And the move higher has been very methodical/consistent. Almost under the radar and stealth like :-) Chug, chug, chug.

 

As vaccinations continue and the economy opens up we should see a big increase in GDP growth in Q2. Inflation expectations are also moving higher.

 

Makes sense to me the 10 year yield will move higher from current levels; just not sure how much higher and how fast.

 

At what point does a rising 10 year bond yield become a problem for the stock market? 1.5%? 1.75%? 2%?

 

I'm not concerned yet. Not to say that nominal rates don't matter, but the rise in nominal Treasury rates has basically matched the rise in inflation expectations from the bottom of the market tick-for-tick. In short, real rates are as negative as they've been since the trough.

 

Until we get a sizable move back towards positive real rates, I think the current stance is still very accommodative to financial assets. We need see yields rise even FASTER or a disinflationary scare that outpaces the drop in rates. Either sends this into a tail spin. Otherwise, probably only modest/normal dips.

Link to post
Share on other sites

Inflation expectations are also moving higher.

 

Gold disagrees.  If gold were rising too, I would agree that inflation might be a concern..  Instead, I think this is the world rushing into the USD and USD assets because of an increasing perception that US GDP is going to recover, with perhaps a big pop this year.  The stimulus is probably overdone but most of it is one-time in nature and deficits have the potential to recede pretty quickly (especially if April income tax collections at the Federal level explode - which I fully expect they will).

 

At what point does a rising 10 year bond yield become a problem for the stock market? 1.5%? 1.75%? 2%?

 

It becomes more a of a problem for the growth-y stocks whose value from a DCF perspective is way off into the future.  Value stocks aren't as impacted, I think.  So - sure FAANG-Y stocks, the Nasdaq might come under pressure, but there are still reasonably priced stocks out there.  This was the case in 1999 as well.  On March 2000 when the Nasdaq bubble popped, there were value stocks that were still really cheap - it was kind of a two-tiered market.  I see that now as well - except this market isn't as wildly overvalued as 1999 was.

 

Just my 2-cents and I could be wrong.

 

wabuffo

Link to post
Share on other sites

Inflation expectations are also moving higher.

 

Gold disagrees.  If gold were rising too, I would agree that inflation might be a concern..  Instead, I think this is the world rushing into the USD and USD assets because of an increasing perception that US GDP is going to recover, with perhaps a big pop this year.  The stimulus is probably overdone but most of it is one-time in nature and deficits have the potential to recede pretty quickly (especially if April income tax collections at the Federal level explode - which I fully expect they will).

 

At what point does a rising 10 year bond yield become a problem for the stock market? 1.5%? 1.75%? 2%?

 

It becomes more a of a problem for the growth-y stocks whose value from a DCF perspective is way off into the future.  Value stocks aren't as impacted, I think.  So - sure FAANG-Y stocks, the Nasdaq might come under pressure, but there are still reasonably priced stocks out there.  This was the case in 1999 as well.  On March 2000 when the Nasdaq bubble popped, there were value stocks that were still really cheap - it was kind of a two-tiered market.  I see that now as well - except this market isn't as wildly overvalued as 1999 was.

 

Just my 2-cents and I could be wrong.

 

wabuffo

 

Gold has been moving down since September, but a more direct measurement of inflation expectations would be TIPS where a direct relationship to inflation expectations can be priced. Tips are reflecting rising inflation expectations that nominal yields have been matching.

 

Gold is impacted by more things than just inflation (like maybe the current narrative that people are moving from Gold to BTC - doesn't matter if it's true, just an example of a non-inflation based argument that impacts gold pricing).

 

And while gold has been down, other supposed inflation hedging precious metals are up (like silver and platinum) so I don't think we can use 6 months of gold price movement as a standalone barometer for inflation expectations while ignoring all other inflation-based assets.

Link to post
Share on other sites

Inflation expectations are also moving higher.

 

Gold disagrees.  If gold were rising too, I would agree that inflation might be a concern..  Instead, I think this is the world rushing into the USD and USD assets because of an increasing perception that US GDP is going to recover, with perhaps a big pop this year.  The stimulus is probably overdone but most of it is one-time in nature and deficits have the potential to recede pretty quickly (especially if April income tax collections at the Federal level explode - which I fully expect they will).

 

At what point does a rising 10 year bond yield become a problem for the stock market? 1.5%? 1.75%? 2%?

 

It becomes more a of a problem for the growth-y stocks whose value from a DCF perspective is way off into the future.  Value stocks aren't as impacted, I think.  So - sure FAANG-Y stocks, the Nasdaq might come under pressure, but there are still reasonably priced stocks out there.  This was the case in 1999 as well.  On March 2000 when the Nasdaq bubble popped, there were value stocks that were still really cheap - it was kind of a two-tiered market.  I see that now as well - except this market isn't as wildly overvalued as 1999 was.

 

Just my 2-cents and I could be wrong.

 

wabuffo

 

Wouldn't bitcoin be the "new gold" these days?

Link to post
Share on other sites

 

Gold and Treasuries are both safe havens so not surprising that both are selling off if there is a lot more confidence in a recovery.

 

There are people buying Bitcoin because they are worried about inflation/monetary debasement. But I think the vast majority see it a bet on increasing adoption and therefore more and more demand over time.

 

Also you'd imagine the Fed would start yield curve control at some point.

 

 

Link to post
Share on other sites

Gold and Treasuries are both safe havens so not surprising that both are selling off if there is a lot more confidence in a recovery.

 

You said it much more succinctly and clearly than I.

 

+1

 

Link to post
Share on other sites

locked in a 2 7/8% fixed down from a 3 1/8% ARM, couldn't help but think of LearningMachine, knowing he'd be proud, can't wait to defease with 10% yielding treasuries.  ;D or refi at 1% when we go full Scandinavian/Japan/Etc.

 

Link to post
Share on other sites

locked in a 2 7/8% fixed down from a 3 1/8% ARM, couldn't help but think of LearningMachine, knowing he'd be proud, can't wait to defease with 10% yielding treasuries.  ;D or refi at 1% when we go full Scandinavian/Japan/Etc.

 

I'm proud of you for doing that, Pupil :-).  Hopefully, it was 30-year long.  Take the free money when you can get it and pay it back in deflated dollars :-).

Link to post
Share on other sites

Seems like a significant mile marker will be when the 10-year is back above the dividend yield on the S&P which is currently around 1.5%. Little ways to go still.

S&P 500 dividend yield above or around the 10-yr is a relatively recent new-era phenomenon. Why would this be a mile marker?

saupload_042120-Yield-spread_thumb1.png

 

Something really weird happened about a year ago and i wonder what it means?

market-chart-sp-500-vs-10-year-treasury-yield-chart-image.jpg

 

If the US risk-free 10-yr ever goes negative, by definition, as the zero limit is reached, the S&P 500 to 10-yr ratio will go to infinity, and beyond?

Link to post
Share on other sites

locked in a 2 7/8% fixed down from a 3 1/8% ARM, couldn't help but think of LearningMachine, knowing he'd be proud, can't wait to defease with 10% yielding treasuries.  ;D or refi at 1% when we go full Scandinavian/Japan/Etc.

 

I'm proud of you for doing that, Pupil :-).  Hopefully, it was 30-year long.  Take the free money when you can get it and pay it back in deflated dollars :-).

 

Same rate that I got a few month ago for. A 30 year mortgage. That’s was my third mortgage for my house bought in 2018. I refinance for every 0.5% down even though my wife gives me flak each time.

 

I watch the 30 year treasury TYX and it is currently at 2.07% , up from 1.3%. It is basically back to 2019 levels.

Link to post
Share on other sites

locked in a 2 7/8% fixed down from a 3 1/8% ARM, couldn't help but think of LearningMachine, knowing he'd be proud, can't wait to defease with 10% yielding treasuries.  ;D or refi at 1% when we go full Scandinavian/Japan/Etc.

 

I'm proud of you for doing that, Pupil :-).  Hopefully, it was 30-year long.  Take the free money when you can get it and pay it back in deflated dollars :-).

 

Same rate that I got a few month ago for. A 30 year mortgage. That’s was my third mortgage for my house bought in 2018. I refinance for every 0.5% down even though my wife gives me flak each time.

 

I watch the 30 year treasury TYX and it is currently at 2.07% , up from 1.3%. It is basically back to 2019 levels.

 

Nice job, Spekulatius!  One of the benefits of being an American!  Everybody in the world wants our dollars and treasuries currently.  Way to go to lock it in for 30 years while it lasts!

 

Wish some of the companies were similarly protecting shareholders from inflation/interest rate risk.

Link to post
Share on other sites

Seems like a significant mile marker will be when the 10-year is back above the dividend yield on the S&P which is currently around 1.5%. Little ways to go still.

S&P 500 dividend yield above or around the 10-yr is a relatively recent new-era phenomenon. Why would this be a mile marker?

saupload_042120-Yield-spread_thumb1.png

 

Something really weird happened about a year ago and i wonder what it means?

market-chart-sp-500-vs-10-year-treasury-yield-chart-image.jpg

 

If the US risk-free 10-yr ever goes negative, by definition, as the zero limit is reached, the S&P 500 to 10-yr ratio will go to infinity, and beyond?

 

This isn't very insightful, but I just think because we are in TINA land like we've never been, once the 10 yr surpasses the S&P yield, especially if a spread opens up, investors will be increasingly inclined to own fixed income. For example, I'm sure there are a lot of people that own dividend paying stocks because they can't find yield anywhere else. But I agree, there is nothing magic about the 10 year matching the S&P yield.

Link to post
Share on other sites

...

This isn't very insightful, but I just think because we are in TINA land like we've never been, once the 10 yr surpasses the S&P yield, especially if a spread opens up, investors will be increasingly inclined to own fixed income. For example, I'm sure there are a lot of people that own dividend paying stocks because they can't find yield anywhere else. But I agree, there is nothing magic about the 10 year matching the S&P yield.

In this field, your insight is as good as any.

Based on Viking's opening salvo in this thread (interest rate gravity rule and relative valuations) the huge question that comes up is: With 10-yr rates at 0.52%, 1.5% or 2.0%, who is buying the stuff (if the mindset is investing ie with the goal to hold to maturity, to get the real principal back upon maturity AND to earn a reasonable return in the interim)? If one considers the possibility that it does not make sense to 'invest' in such securities, why do 'we' use this as a risk-free benchmark?

Anyways, some people feel that the greatest bond bull market reached its peak when the 10-yr hit 0.52%:

https://compoundadvisors.com/2021/the-worst-year-for-bonds-in-history

Disclosure: i've never been thrilled about 'recoveries' based on extrinsic 'reflations' and continue to be haunted by what 'ex-permanent-plateau' Irving Fisher said about specific environments: "The more debtors pay, the more they owe".

Link to post
Share on other sites

...

This isn't very insightful, but I just think because we are in TINA land like we've never been, once the 10 yr surpasses the S&P yield, especially if a spread opens up, investors will be increasingly inclined to own fixed income. For example, I'm sure there are a lot of people that own dividend paying stocks because they can't find yield anywhere else. But I agree, there is nothing magic about the 10 year matching the S&P yield.

In this field, your insight is as good as any.

Based on Viking's opening salvo in this thread (interest rate gravity rule and relative valuations) the huge question that comes up is: With 10-yr rates at 0.52%, 1.5% or 2.0%, who is buying the stuff (if the mindset is investing ie with the goal to hold to maturity, to get the real principal back upon maturity AND to earn a reasonable return in the interim)? If one considers the possibility that it does not make sense to 'invest' in such securities, why do 'we' use this as a risk-free benchmark?

Anyways, some people feel that the greatest bond bull market reached its peak when the 10-yr hit 0.52%:

https://compoundadvisors.com/2021/the-worst-year-for-bonds-in-history

Disclosure: i've never been thrilled about 'recoveries' based on extrinsic 'reflations' and continue to be haunted by what 'ex-permanent-plateau' Irving Fisher said about specific environments: "The more debtors pay, the more they owe".

 

Who is buying this stuff? Pensions. Insurance Cos. Government agencies. Banks.

 

People who have to buy it regardless of prospective return due to regulatory reasons.

 

Of course, you also have speculators like myself who buy it for a round rip on yields - but not to hold to maturity.

 

I agree with your point using it as a relative benchmark to price other assets IS stupid though. Even if I bought the argument that "low rates = high multiples", which I don't, it would seem then for rates to move from 0.5% to 1.5% would result in an equity crash - instead? We're up 65%

Link to post
Share on other sites

10 year has popped another 5 bps today. I haven't read Robert Shiller's book on Narrative Economics but I'm always amazed how things kind of take on a life of their own. There is a growing narrative in financial media about rising rates and inflation. The same seems true for bitcoin/crypto as several large institutions have said they're getting in on it in some respect. Definitely seems like positive feedback loops.

 

That said, commodity prices are definitely rising. Energy was going up even before the polar vortex event. A few of my friends work in the trades and they've both mentioned that material prices have gone up significantly over the last 6 months.

Link to post
Share on other sites

 

Yeah narratives can be very powerful especially in speculative markets. The reflation one does seem quite compelling: trillions of fiscal stimulus, mass vaccinations, re-opening etc. And we've already seen in Q3 2020 how massive fiscal stimulus can completely override the business cycle.

 

But I also wonder how durable a recovery is if it is almost entirely supported by transfer payments and we are stuck in a debt trap and a liquidity trap.

 

And what happens if markets start to worry about overheating?

Link to post
Share on other sites
  • 2 weeks later...

The move in the 10 year yield is becoming a more serious risk for equity markets. The problem appears to be the speed in the move. If the 10 year continues to rise a the pace (10-15 basis points per week) it is only a matter of time until we see a major correction in stock prices (minimum 10%). The next week or two will be important: do yield increases slow giving financial markets time to digest what is going on or do we see the relentless move higher continue?

 

Now i say ‘equity market’. We really have a bifurcated market and perhaps what we see is a continuing rotation into cyclical type plays. So perhaps a flat to down 10% market with big winners and losers.

 

Now i do expect the Fed to come to the rescue (they have no choice). The question is one of timing.

 

Bottom line, if the 10 year continues to move much higher in the coming week and weeks i will get more cautious with my portfolio and raise my allocation to cash (and lock in some substantial equity gains from the past 4 months).

 

I am pretty bullish on the economy moving forward. I am also starting to wonder if the inflation numbers we see in about 6 months or so do not materially exceed current forecasts. Commodity markets are on fire with no end in sight; this is just one example of inflationary pressures that will lead to higher inflation later this year.

----------------------

Wall Street Week: Feb 26 - they spend a great deal of time talking about bond yields and financial markets

-

——————————-

3 reasons the rise in bond yields is gaining steam and rattling the stock market

Al-Hussainy says until the central bank backs up its words with concrete actions, such as tweaking its asset purchases, yields could keep moving higher

- https://www.marketwatch.com/story/3-reasons-the-rise-in-bond-yields-is-gaining-steam-and-rattling-the-stock-market-11614292476

 

1.) Inflation: For many, rising inflation expectations are the simplest reason for the yield ascent.

2.) Insufficient Fed action: Indeed, the lack of willingness on the part of the central bank to lean against rising bond yields has emboldened the bond bears this week.

3.) Forced sellers: Market participants also suggested yields were moving beyond fundamental forces, and that inflation fears weren’t enough to explain why rates were moving up at such a ferocious pace. “A lot of this move is technical,” Gregory Faranello, head of U.S. rates at AmeriVet Securities, told MarketWatch. He and others suggest the yield surge may have been a case of selling causing more selling, as investors caught offsides were forced to close their bullish positions on Treasury futures, in turn, pushing rates higher.

Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...