Monday, May 21, 2018

Ten Year Treasury at 3.11% Signaling End of an Unsustainable Trade Cycle

The US 10 Year over the past several days has pierced the 3.11% level for the first time since May of 2011, seven years ago to the day when the 10 year closed at a yield of 3.12% on its way downward to all-time lows in the 1.50% range in the summer of 2012 and again in 2016.

This chart pattern is indicative of a clear shift in trend, one where it is unlikely that the ultra-low depths charted 2 and 6 years ago will be re-visited.  What is the driving force behind this trend reversal and why is the 10 Year rate accelerating higher so quickly?  Not surprisingly, the force for change has a very clear impetus, the Trump economic policy passed in December 2017 which squarely puts in place a plan which as executed will unravel the past 25 years of trade and fiscal policy – if the new policy stays in place long enough.

The 10 Year Treasury breaking out above 3% in yield is actually not a historical anomaly.  In fact, 83.74% of the time the 10 Year has posted month end close levels above 3% since April 1953.  The average yield from 1953 to the present has been much higher, 5.85%.  These facts become abundantly clear when you view the historical Treasury yield curve dating back to WWII.

The question on many investors’ minds is whether the rate trend higher will continue, and indirectly, will a trend higher be detrimental to stocks?  I believe the answers to these questions are yes and yes.