Yesterday all markets were relatively subdued as fed speakers, Treasury auction and data had little impact.

Bloomberg observed yesterday the increase in Treasury yields is “Becoming a VaR Nightmare.”  VaR or “value of risk” is a statistic that measures and quantifies the level of financial risk within the market for a period of time.  It provides an estimate of loss that is expected to be exceeded at a given level of probability over specified time period.

Bloomberg writes the VaR from October through December was only worse in about 16% of the 191 quarters in data going back to 1973.  The VaR has continued to rise during the first five weeks of 2021 and is currently at the point where the climb in yield will have a domino effect on other assets, specifically equities that are trading at an “unrealistic or unsustainable multiples.”

The newswire further opines rising rates can become a “viscous feedback loop” given current levels of concentrations and leverage, leverage which is amplified via options and derivatives.

Many times, I have commented about the huge increase in government spending.  According to the CBO, spending in January jumped 35.2% while revenue increased just 3.3%, the result of recently passed stimulus.  The CBO projects a 2020 budget gap of $3.1 trillion, the largest on record on both an absolute and relative basis as compared to the size of the economy.

The Administration has correctly noted in its argument for an additional $1.9 trillion stimulus package that interest payments on the debt actually shrunk in fiscal year 2020, the result of a plunge in borrowing costs.  However, what would be the impact if rates started to rise?

I guess the correct question or concern is how steep of a rise.

What will happen today?  Will the markets respond to several sentiment surveys and jobless claims?

Last night the foreign markets were quiet.  London was up 0.06%, Paris up 0.01% and Frankfurt up 0.48%.  China and Japan were closed for a holiday and Hang Seng   up 0.45%.

The Dow should open quiet. The 10-year is unchanged at a 1.15% yield.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.