Reading into the breakout a bit too much.


They are calling it a “breakout” which is hard to say with a straight-face in the context of still secularly low interest rates. That said, the 10yr US Treasury yield has made a pronounced move higher starting in September 2017 and carrying through these first few weeks of the new year. The benchmark yield now rests near 2.6% after being 2.0% at the end of Q3 2017 and hit a recent low of 1.4% in July 2016. The 10yr US Treasury rate did get close to 2.6% in the early months of 2017 but before that you have to go back to 2014 to get a print higher than where we are today. It’s far too early to say the next secular bond bear market has begun (like some pundits have) bought we cannot help but consider if that the markets are trying to tell us something.

Let’s review a few more points to paint a picture. This recent rise in long-term rates is occurring while the Federal Reserve is cutting back their Treasury market purchases (the Fed has been the largest net buyer as their balance sheet expanded). In addition, Congress just passed the tax reform act which is officially estimated to increase the US deficit (which would be funded in the near-term by issuing more Treasuries). In the meantime, the USD has been weakening relative to its peers despite the Fed raising short-term rates (granted other central banks are on the tightening path as well). More supply of Treasuries with a reduction in demand causing prices to fall and yields to rise, however non-US investors are not stepping in and instead are selling down the US Dollar. It would seem that the global financial market is expressing concern of whether US companies and individuals will use their deficit-funded windfalls productively (i.e. create a true economic return) or if the result will just be higher inflation and a worse US fiscal position. Wait and see.