COMMENTS ABOUT THE YIELD CURVE

The yield curve is the steepest it has been since 2016.  The current difference between the 2 year and 10-year Treasury is about 100 bps (basis points) up from about 40 bps and 70 basis points 10 and one month ago, respectively.  The historic spread between “2s and 10s” is about 250-300 bps.

It is widely known the Federal Reserve intends to keep the overnight rate around 0.00% until late 2023.  Will the yield curve revert back to the mean because of the incessant demand for monies by the government?

Some have stated the Fed will buy more Treasuries to keep yields low.  I ask how does the government pay for the debt?  Simplistically speaking, it would print money or aka monetizing the debt.  This potential monetization of the debt is a major reason why the dollar has experienced considerable weakness.   I must write that it is widely accepted that a declining dollar is inflationary.

A large number of market luminaries from the FRB Chair to the President of JP Morgan to many iconic money managers have commented about market valuations in certain sectors stating such are near or at record levels, warning a rise in interest rates which are still around all-time lows will greatly increase market volatility.

Much to the chagrin of market regulators, equity liquidity is “lousy,” albeit it has improved nominally from record low levels.  Some would find this statement absurd given the number of shares traded each day.  The traditional market stabilizers, however, have been regulated out of existence under the guise of making the financial system “sounder and more stable.”

The last several days there have been numerous Fed officials that have implicitly stated that the central bank does not intend to alter their planned Treasury purchases, perhaps in an attempt to avoid a repeat of 2013’s taper tantrum when yields spiked about 150 bps and equities swooned. As widely known this was the result of the Fed’s announcement that it would begin to curtail Treasury purchases.

I rhetorically ask is the Central Bank concerned about market fragility given that to the best of my knowledge there has been no comments about a potential curb of government bond buying?

We are living in incredibly interesting and challenging times.  This too shall pass and the country and the markets will emerge stronger from it.

Commenting on yesterday’s market activity, equities were mixed, oil and the dollar nominally lower and bond prices insignificantly higher.

Last night the foreign markets were up.  London was up 0.68%, Paris up 0.13% and Frankfurt up 0.23%.  China was down 0.91%, Japan up 0.85% and Hang Seng up  0.85%.

The Dow should open flat ahead of an expected announcement from the incoming Biden Administration of an additional $2 trillion stimulus. Treasuries are down about a point, NASDAQ futures off about 1% and commodities are up.  The dollar is nominally weaker.

 

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.