Not Since April 2002…
Not since April of 2002 has the 10-year Treasury yield went over 5.32%. Why this matters to the markets, consumers and the economy? The 10-year essentially dictates interest rates on credit card debt, which is currently over $1 trillion, mortgages and auto loans. If that doesn’t smack the consumer in the face, nothing will. Why are Treasuries falling so hard sending yields higher? Put simply more supply than demand. If the United States and governments from around the world continue to run huge budget deficits while issuing record amounts of debt, this dynamic will continue. What’s more and what is in direct competition with government issued debt, are tech companies borrowing $Billions for AI infrastructure. There are a few solutions that could turn the tide and they are 1. Aggressive Treasury buy backs 2. The Federal Reserve could pause its Quantitative Tightening (QT), e.g. the Fed could sell its short-term bond holdings and use that cash to buy long-term 10-year and 30-year Treasuries, which would force long term yields lower without printing new money. 3. The end of the conflict in the Middle East which would send crude prices lower. Only time will tell if the powers at be execute any of these solutions.
What’s even more crazy is how the stock market has held up during this bond and yield shock. Not to mention the ongoing war. The major averages continue to flirt with all-time highs despite the turmoil in the bond markets. The Dow Jones Industrial Average (see chart here) continues to trade above 50,000 while the S&P 500 (see chart here) remains 180 points from its all-time high while the Nasdaq Composite (see chart here) is also a couple of percentage points from its all-time high. The one standout is small-cap Russell 2000 (see chart here) which is starting to show some cracks at it is now testing its 200-day moving average.
Folks, I am not sure how much longer stocks can weather the bond market turmoil. Let’s hope the powers at be start taking action to stem the tide.
Good luck to all 🙂
~George