Short dated Treasuries rallied after a “solid” $44 billion seven year note auction. The market is now again suggesting interest rates will be cut twice by year’s end. The volatility in expectations is great and these expectations could radically change yet again following the interpretation of next week’s top tier data.
The S & P 500 pared most if its early morning NVDA inspired advance as the Administration said it would go to the Supreme Court as early as today if an appeals court does not put on hold a decision finding most the President’s tariffs as illegal.
In contrast to the narrative and as noted the other day, long dated Treasury yields are lower today than they were at the start of the year. The yield curve however is considerably steeper.
Bloomberg writes the current yield on the benchmark 10-year Treasury is more than a percentage point lower than its historical average of 5.6% since the 1950s. Even if one removes the period from 1980-1985 in which the 10-year was persistently above 10%, the historical average declines only modestly to 5.1%.
Nor is the recent interest rate volatility unusual. Bloomberg again writes the 10-year yield has been volatile since April 2, but similar and always temporary spikes in volatility were common throughout the 1970s and 1980s and have occurred regularly during every decade since then.
As widely discussed, the 10-year Treasury has not topped 5% since before the 2008 financial crisis even though it was higher than for more than half of the time since the 1950s.
If the 10-year Treasury goes above its historical average of 5.6%, for example 7% or 8%, Bloomberg writes that this would be well within its normal range and only a one standard deviation move.
The major issue at hand is that rates have been abnormally low with many suggesting blatant yield curve suppression via Treasury and Federal Reserve intervention.
A major concern is if rates overshoot in the other direction from the mean, defined as exceeding the upper range by the same amount as it has on the lower range. As noted the 10-year is still 100 bps below its historical 75-year average. Statistics dictate that there will be a reversion to the mean and a one standard deviation from the mean can cause a dramatic increase in the country’s interest burden.
Next week is a huge data week. Will the “hard data” follow the weakening of the “soft data.” To date the economic data has been robust and inflation is not accelerating. Most have stated this is the calm before the storm and the data will deteriorate in the weeks and months to come.
What will happen today?
Last night the foreign markets were mixed. London was up 0.69%, Paris up 0.27% and Frankfurt up 0.93%. China was down 0.47%, Japan down 1.22% and Hang Seng down 1.20%.
Futures are flat amidst tariff uncertainty. Will today’s release of the monthly PCE (inflation) statistics impact trading? Also released is a sentiment survey and inventory data. The 10-year is off 1/32 to yield 4.42%.
