This graph, lifted from Chris Kimble Solutions, the great technician out of Cincinnati, show shows the 10-year Treasury yield at a critical juncture.
This graph, (I think its from from Charlie Bilello at Pension Partners from Twitter) shows the 10-year Treasury yield already through critical resistance.
The February ’18 payroll report will be released on Friday, March 9th, 2018. My guess is that will be the next major flash point for Treasuries given that it will now include 2 full months of tax reform, which in my opinion is still not enough time to feel the corporate impact of the legislation.
Personally, I am all for “pro-growth” economic policies, but tax reform came with the US unemployment rate already in the low 4% range and now with the budget deal and the “deficit busting” there should be continued upward pressure on Treasury yields not just from wage inflation, but from additional Treasury supply.
Once last post – again from Charlie Bilello (Charlie’s Twitter handle is @charliebillelo) – on the returns of the various bond market classes YTD as of 2/14/18.
Client accounts are hedged with the TBF, and have been for the last few years which has – up to 2018 – been a drag on bond allocation returns.
In 2013, the last negative year for the TLT, the TBF returned over 11%, a strong relative return to the rest of the bond market.
Conclusion: There hasn’t been a negative year for Treasury returns since 2013, so – statistically anyway – we are due for a tough year for the bond markets. What is surprising me is that even corporate bonds are not holding up as you might think given tax reform and cash repatriation, etc. Tax reform did have some legislation regarding deductibility of interest expense, leverage and the use of leverage relative to EBITDA, but everything I read said that it would only impact the very low end or bottom 10% – 15% of the high-yield bond market, if that much.
I have to say it here: 2018 could turn out to be much worse than 2013 in terms of bond market returns the way the stars have lined up with pro-growth policies in the US, more supply, Fed monetary policy and the contracting balance sheet,and renewed growth outside the US, like EM’s, Japan and Europe – it’s almost like the perfect storm is poised to hit interest rates and the bond market(s).
And yet i hear pundits every week looking for a TLT rally – and it could happen – almost every day on CNBC, Bloomberg, and Fox.
An orderly rise in Treasury yields and the US stock market will be ok; a disorderly or rapid and unexpected rise in treasury yields, like the 10-point loss in the 30-year Treasury bond in the Spring, 1987, and the US stock market will eventually have a problem, considering the very low nominal yield levels from which the rate rise is beginning.
Be careful out there.
Thanks for reading…