Both Citicorp and Merrill Lynch are suggesting the 10-year will yield 2.0% by year’s end.  Merrill further stated this increase in yields will cause a 16.5% decline in the S & P 500 as valuations are stretched in “every metric.”  If yields rose to 2.0%, Bloomberg analytics suggests the 10-year will have an annual negative return of 12.45%.

Both firms believe the rise in yields will commence around the Jackson Hole Symposium, the result of Fed tapering and longer-term economic rebound, partially the result of surging money supply.

Speaking of money supply, First Trust comments money supply is up 33% since February 2020.  Hypothetically prices plus real output should rise by 33%.  First Trust comments that inflation will not be 33% given the increase in productivity, but states the increase in money supply is “more excess money than the US economy has absorbed since the 1970s.”

There are only two ways to overcome debt…restructure or inflate.  Given the US Treasury is the global benchmark, restructuring is not an option.

Asking rhetorically, will the Fed state the new speed inflation speed limit is now 3.0% versus 2.0%?  Last August the central bank stated it would permit both inflation and growth be above this 2.0% speed limit for undetermined amount of time or amount.

Many times, I have commented about the lack of liquidity in the bond market.  B of A further quantified this liquidity crisis.  The Bank states dealer inventories of investment grade rated bonds has plunged to only 0.2% of total market trading volume from about 5.0% in 2007.  The Bank states investment grade issuance has surged 50 fold in the last fifty years.

Wow!  What happens if selling really commences?   Will the phrase “velocity of change” take a new meaning?

Changing topics, it was released yesterday a purchasing managers index fell to an eight-month low in August, the result of “material shortages, a lack of labor and an upswing in coronavirus infections.”   A gauge of supplier deliveries showed greatest lead time in records back to 2007.

Job growth also waned to the lowest since last July but this is the result of “companies either failed to find suitable staff or existing workers switched jobs.”

Because of the above, input price increased in August to the second highest reading in data going back to 2009.

In my view the above is evidence of strength not weakness.

Treasuries were essentially unchanged on the data but equites advance perhaps under the belief the Fed will not commence tapering in the intermediacy.  Equities were also bolstered by full approval of Pfizer’s COVID vaccine.

What will happen today?

Last night the foreign markets were mixed.  London was down 0.23%, Paris down 0.37% and Frankfurt up 0.33%.  China was 1.07%, Japan up 0.87% and Hang Seng up 2.46%.

The Dow should open flat as all awaiting further insights into Fed policy and lingering concerns about the COVID.  The 10-year is  off 3/32 to yield 1.27%.


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.