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Rates Rise

05/29/2013

On Wednesday morning, May 29, the yield on the 10-year U.S. Treasury touched 2.2318%, its highest level since April 2012. Keep in mind, it was the late March 2012 price action that precipitated a larger, prolonged sell-off below 2% throughout 2012 and early 2013.

The high yield for 2012 was 2.3954% (Figure 1.1), viewed as the next major long-term resistance level by bond players. That level sits neatly below the October 28, 2011 print of 2.4176%. Above 2.4176% little resistance is found until 2.815%.

The velocity of the recent move in Treasuries is what concerns the capital markets most. In fact, the entire yearly range for the 10-year (Figure 1.2) has occurred during the month of May. The 2013 low print was on May 1 at 1.6120%, while the high print was May 29 at 2.2318%. Over the next few weeks, I expect investors will gain substantial clarity on the direction of the 10-year for the remainder of 2013. That clarity will come directly from the economic data during the first week of June which includes the June 7 U.S. Labor report.

Investors are also watching the Japanese government bond, which is experiencing a similar, and, I would argue, much needed yield spike this month. In late April the JGB 10-year hovered below 50 bps at 0.45% only to reach 0.93% in the past few hours. I do not expect that will motivate BOJ Governor Kuroda to alter his current easy momentary policy at all. In fact, I expect his position to be somewhat akin to Chairman Bernanke’s in 2009. The FOMC needed three rounds of quantitative easing. The BOJ has more firepower in its arsenal.   

I expect the most important question to consider is not so much what impact a global rise in yields has on consumers. More importantly, I will be monitoring the impact on corporate earnings and capital allocation strategies. Low interest rates have been so critical to reducing corporate debt burdens, increasing share buybacks, and returning capital to shareholders. For me that is what must be watched most closely.

Today marks the fourth trading day since last week’s ugly SPX reversal. Clearly given the price action, the SPX remains on the defensive. There is no evidence yet to a restart of bullish momentum as was witnessed in each of the prior 2013 post-FOMC minute release modest corrections (Figure 1.3).

Finally, the following table shows the trading range for regional 10-year government yields from 2008 to the present, as well as current yields. The absence of strong global growth is clearly evident. Growth expectations are not lifting rates. More like a modest reversion to the prior five years’ mean.

  Global 10-Year Treasury Yields, 2008-2013

Country

Price

Current Yield

2008-2013 Low

2008-2013 High

Japan

97.096

0.923

0.436

1.543

Germany

99.71

1.532

1.164

3.714

United Kingdom

97.915

1.997

1.435

4.223

France

97.26

2.057

1.656

4.048

Canada

94.767

2.083

1.571

3.712

United States

96-18

2.133

1.387

3.986

South Korea

100.411

3.029

2.718

5.633

Mexico

138.450

3.192

2.345

6.959

Australia

116.884

3.467

2.765

5.845

Brazil

148.50

3.477

2.292

7.070

New Zealand

115.890

3.575

3.129

6.057

Colombia

140.115

3.653

2.790

7.704

Italy

102.895

4.182

3.714

7.227

Spain

107.765

4.393

3.718

7.511

Greece

64.175

8.577

4.406

30.592

 Source: Bloomberg

Figure 1.1 10-Year U.S. Treasury, January 2012 to May 2013

5-29 - a 

Source: Bloomberg

Figure 1.2 10-Year U.S. Treasury, 2013 to Date

5-25 - b

Source: Bloomberg

Figure 1.3 S&P 500® Index (SPX) Year to Date

5-29-c

Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.