Author Topic: 10 Year Bond Yields  (Read 7343 times)

Viking

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10 Year Bond Yields
« on: January 20, 2018, 11:50:32 AM »
Over the years I have read many times that if you want to understand what is going on in the economy you should pay attention to what is going on in the bond market (more so than the stock market).

The yield on the US 10 year bond is now trading at 2.66%. Gundlach, in his last conference call said the key level, from a technical perspective, was 2.63%. He said if this level was breached, one could call an official end to the bull market we have seen in the 10 year bond for the past 30 years. Gundlach also said once 2.63 is breached 3.00% is the next level to watch and rates will likely move up towards this level over 2018.

Gundlach also called for the S&P to finish the year down in 2018 (which is quite the gutsy call given everything that has happened the past 14 months): after a strong start, as the 10 year moves close to 3.00% he expects stocks to sell off later in the year as higher bond yields (and the threat of even higher bond yields in 2019) eventually starts to factor into stock market valuations.

Buffett has said many times that he does not feel the stock market is expensive when the US 10 year treasury was yielding In the low 2% range. I wonder what he will say when the 10 years is yielding 3 or 3.5%?

If bond long yields continue to move higher my base forecast is we are going to get a lot more volatility in the stock market. If the 30 year bond bull market is indeed dead then we are entering a new world for investors. Might be good to raise some cash if stocks continue their parabolic ascent. Sounds to me like the bond bell is starting to ring :-)

PS: Fairfax looks to be positioned pretty well if 10 year yields move a lot higher :-)
« Last Edit: January 20, 2018, 11:57:30 AM by Viking »


Cigarbutt

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Re: 10 Year Bond Yields
« Reply #1 on: January 20, 2018, 12:39:09 PM »
When you look at the interest rates (ie US 10 yr bond) trajectory in the last 30 to 40 years, the trend cannot continue unless interest rates become negative. ???
It may be reasonable to expect higher interest rates going forward. But cannot offer a "base forecast".

With all this talk about relative valuations between asset classes, it seems that what you describe is becoming mainstream thinking.
Another example (skip the section on China, look at graph Cyclically Adjusted Earnings Yield US 10yr Bond Yields... and associated commentary):
http://archive.is/6BCMF

I wish I could see what's coming but it is always darkest just before the Day dawneth.

vinod1

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Re: 10 Year Bond Yields
« Reply #2 on: January 20, 2018, 01:01:22 PM »

Buffett has said many times that he does not feel the stock market is expensive when the US 10 year treasury was yielding In the low 2% range. I wonder what he will say when the 10 years is yielding 3 or 3.5%?


I have been very closely following Buffett's comments on interest rate impact on stock valuations. Buffett has said that stocks would look cheap in three years time if interest rates were 1% higher, but not if they were 3% points higher. I think he made these comments when the 10 year is in the 2.2% to 2.3% range.

I think only if bonds start hitting the 4% range it would start impacting stock valuations.

Vinod
« Last Edit: January 20, 2018, 01:03:23 PM by vinod1 »
The fundamental algorithm of life: repeat what works. –Charlie Munger

EliG

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Re: 10 Year Bond Yields
« Reply #3 on: January 20, 2018, 01:18:11 PM »
Gundlach also called for the S&P to finish the year down in 2018 (which is quite the gutsy call given everything that has happened the past 14 months): after a strong start, as the 10 year moves close to 3.00% he expects stocks to sell off later in the year as higher bond yields (and the threat of even higher bond yields in 2019) eventually starts to factor into stock market valuations.

When yields are below 5%, rising rates have historically been associated with rising stock prices.

See attached chart from JPM Guide to the Markets.

cherzeca

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Re: 10 Year Bond Yields
« Reply #4 on: January 20, 2018, 01:37:49 PM »
@eliG

so from graph (thanks for posting) it appears that since 1963, whenever 10yr treas rate was below 4%, there never was a two year month to month comparison to stocks where rates went up and stocks went down...which is pretty remarkable.

but given the history of interest rates since 1963, aren't we only considering for this subgroup of rising rates < 4% a historical period back in the 60s, certainly before reagan and i would venture without looking before carter?

since reagan we have been almost entirely in a lowering interest rate environment.  just wonder how relevant to current situation

rb

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Re: 10 Year Bond Yields
« Reply #5 on: January 20, 2018, 02:54:12 PM »
Here's whats bothering me about the slide that EliG posted:

Over the period of the chart: May 1963-Dec 2017 10 year treasury has been below 4% in the following periods:

May 1963-Jun 1963
Sep 2002-Jul 2003
Jun 2005-Jul 2005
Jan 2008-Present

Basically the long period of time is meaningless. All the data in there is recent history which we're all familiar with. Including one month from 1963 is statistically meaningless. Also May 1963 feels like a weird cutoff point for a dataset.

EliG

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Re: 10 Year Bond Yields
« Reply #6 on: January 20, 2018, 03:38:24 PM »
since reagan we have been almost entirely in a lowering interest rate environment.  just wonder how relevant to current situation

JMP chart looks at the weekly stocks returns. I think it captures every little zig and zag in the 10 year treasury rate. There were quite a few of them since year 2000. See the chart below.

That said, I agree with the skepticism that you and rb expressed.

Viking

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Re: 10 Year Bond Yields
« Reply #7 on: January 20, 2018, 03:44:11 PM »
Moving forward, I think the ECB and BOJ will be key to long bond yields.

It really has surprised me what the FED has been able to accomplish in the US in the past 15 months. The Fed has demonstrated over the past 15 months that a central bank can raise rates from crazy low levels with little impact on the overall economy; they just need the guts to do it :-). I think back to pre-Sept 2016 and for 8 years straight all everyone was talking about all day was what the Fed was going to do. Today they are way down on the list of topics (and still important).

The ECB and BOJ have to tighten at some point in time so when the next recession comes they have options. They have a window today to do so. IF they do start to shift their stance I think bonds on the long end could spike (with a quick move of 40 or 50 basis points) and this could certainly spook stock markets.

I think the number one risk to the stock market today is a rapid rise in 10 and 30 year bonds. But this will only happen if the ECB and BOJ shift and get much more aggressive with slowing bond purchases and hiking rates; may happen in 2H if global economies continue to show solid growth.
« Last Edit: January 20, 2018, 03:46:19 PM by Viking »

vinod1

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Re: 10 Year Bond Yields
« Reply #8 on: January 20, 2018, 06:27:10 PM »
I am attaching a chart of 10 year treasury rate from 1790 onwards. Data from 1871 onwards is more reliable but this is the data we have.

1790 to 1870 rates are 5% to 7%
1870 to 1960 rates hovered around 3%
1960 to 2000 rates shot up from 5% to 15% and then back to 5%
2000 to 2017 rates kept dropping from 5% to 2%

When people talk about "Normal" they are primarily referring to the 1960 to 2000 period.

When people talk about "New Normal" they are primarily referring to the post 2000 period.

But what is normal, is really a matter of how far back you are looking.

If we consider rates from 1870 ("Old Normal"), then current rates are nothing unusual.

If we consider rates from 1790 ("Really Old Normal"), then current rates are indeed low but not exceptionally so.

Vinod
« Last Edit: January 20, 2018, 06:43:36 PM by vinod1 »
The fundamental algorithm of life: repeat what works. –Charlie Munger

cherzeca

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Re: 10 Year Bond Yields
« Reply #9 on: January 20, 2018, 07:31:05 PM »
so the thought provoking idea in this thread is, if you believe that rates go up in 2018, is that good or bad for equity.  gundlach says bad.  historical evidence is equivocal though the JPM graph implies that it's good at least until 10 yr hits around 5...which is almost double from here.