U.S. 10-Year Treasury Yields
This morning the U.S. 10-year Treasury yield traded at 2.3011%, its lowest level since June 19, 2013. Keep in mind, on that day former Federal Reserve Chair Ben Bernanke alerted markets to a “tapering timetable” during a post-FOMC press conference. Many technicians and Treasury participants cited the June 19, 2013 price move as the catalyst for a breakout in yields toward 3% by the end of 2013. On a technical basis, there has been some longer-term support at 2.25%-2.30% since that day’s breakout (Figure 1).
Figure 1: U.S. 10-Year Treasury Yield, January 2013 - Present
The Fed’s tapering of monthly asset purchases began just six months later on December 18, 2013. By January 2, 2014, the U.S.10-year Treasury yield reached a high of 3.0516%. At the time the overwhelming consensus forecast was for yields to rise beyond 3.25% in 2014. But a classic scenario of “buy the rumor, sell the fact” unfolded as the 3.0516% print on January 2 has been the high yield print year to date, ironically enough just weeks after the actual initiation of FOMC asset purchase tapering.
Many along the way, including myself, have registered tremendous surprise at the direction of yields. Hopefully, it is a lesson well learned for investors to embrace both equity-sensitive and bond-sensitive investments, rather than a binary choice between the two, which seemed to be the case earlier this year.
Evidence suggests that the yield sell-off to the June 19, 2013 level is not predicated on a deteriorating domestic economic or corporate outlook. Currently, 468 companies listed on the S&P 500® Index (SPX) (Figure 2) have reported calendar Q2 earnings with sales growth of 4.41% and EPS growth of 9.56%. Recent economic data points still suggest Q3 U.S. GDP is at least 3%.
Figure 2: S&P 500 Index (SPX) Calendar Q2 Earnings
Clearly the litany of geopolitical concerns is creating strong demand to own U.S. Treasuries. I know it may sound rather simplistic, but in reality I suspect that explains much of the moves lower from 2.66% on July 7 to 2.3011% today. Ukraine, Iraq, Gaza – take your pick.
Additionally, as I suggested back in May, “behavioral finance” is also playing a large role in the move lower for yields. For much of the year the consensus and speculative community has taken the other side of the yield sell-off. In that type of environment, rarely are “bottoms” formed, and generally they only are formed once the speculative community has given up on the premise that their thesis will be correct.
It seems too many are spending a tremendous amount of mental capital trying to predict when the bottom in yields will occur. I myself tried that a few months back and quickly abandoned the futile effort. Yields will rise eventually. Maybe it’s “buy the rumor, sell the fact” all over again. Just as yields topped out on the actual implementation of FOMC asset purchasing, maybe they will finally bottom out on the actual completion of FOMC asset purchase tapering during the fall.
Either way, don’t spend too much mental and financial capital trying it figure it out, I suspect it will be obvious to all when the yield spike is unfolding.