(The weekly SP 500 earnings update will be out early Sunday morning – the close in the 10-year Treasury yield on Friday, April 20th, could be a game changer and SP 500 earnings might take a back seat what is happening in Treasury markets.)
The recent move higher in the 10-year Treasury yield was somewhat surprising since the ” the yield curve is going to invert” and “the-sky-is-falling” crowd was out in full force the last few weeks, warning about a pending recession and a Treasury yield curve that was likely to see the 10-year Treasury yield trade below the 2-year Treasury in short order.
What accounted for the recent push higher in the 10-year Treasury yield ?
In the last year, the CFA Society of Chicago, which runs a Vault Series in downtown Chicago that features some excellent speakers for a one-hour presentation on relevant topics around investing and the capital markets, featured David Ranson, the owner of a boutique research firm in Portland Oregon by the name of HCWE & Company, who gave a presentation on his “Markets Forecasting Markets” business model.
When David visits Chicago we grab breakfast or lunch and talk all things investing, which is enjoyable for me given David’s impressive background (David and his wife are living in Portland now).
The point of this is that David shot me an email this week detailing an economic release that was well under the radar but caught David’d eye, and might help explain Treasury market action:
“On another topic, further to our recent conversation, there was a bit of a bombshell Thursday morning from the Bureau of Economic Analysis. Real intermediate output grew at a rate of 7½ percent in the fourth quarter. This is a strong leading indicator of GDP, but the neat thing is that hardly anyone is watching it! The news implies an extremely strong start to GDP growth this year – probably overriding the drag from capital-market turbulence. 2018 has begun on an unexpectedly strong note that investors haven’t yet had a chance to recognize, forecasters remaining pessimistic. I see chances for 3+ percent growth in 2018 – or even 3½ percent – greatly strengthened. More specifics available shortly.
Regards – David”
On this blog, in the latest post on Friday, April 20th here, it was noted that the Advance look at Q1 ’18 GDP is due out next Friday morning, April 27th, and will be the first look at the key economic indicator. Most are expecting a relatively inline or unsurprising GDP number, certainly the weakness in retail sales and the typical first quarter economic weakness has only codified that expectation.
Here is recent article David Ranson wrote on March 21, ’18 which draws some interesting conclusions about the “rates are normalizing” discussion heard frequently in the financial media. Read the “conclusion” first and then back track on the article. Not being a big gold bug, personally i have some reservations about the correlation between gold and the longer-end of the Treasury curve, but when managing money for clients it is necessary to read well-written arguments that are contrary to your own thinking to remain open-minded and not get locked into damaging mindsets.
Reading solid technicians like Gary Morrow (@garysmorrow) and Chris Kimble (@kimblecharting) have noted that gold is close to a longer-term breakout.
In 2013, as we headed into 2014, i thought the US Treasury market might be headed for a “1994” kind of year, (6 rate increases and a 13% full-year decline in the TLT) and it never happened. With tax reform and the “return to global growth” theme’s starting to take shape, maybe we are a step closer to that in 2018. It’s been a long time since investors have seen a tough year for interest rates and Treasury prices.
The SP 500 returned roughly 1% in 1994.
The TLT ETF wasn’t around back then, but the 10-year Treasury’s total return in 1994 was -10%.
It could be an ugly year for the bond markets.
It’s strictly a guess, but the 10-year yield is acting like it wants to break out above the late 2013 highs of 3% – 3.03% sooner rather than later.
Thanks for reading – out with an SP 500 earnings update tomorrow.