27 Nov THOUGHTS ABOUT THE 10-YEAR TREASURY
Last year at this juncture the 10-year was yielding around 3.25% and consensus was expecting the 10-year Treasury to broach 4% sometime in 2019 as the Fed continued with its anticipated tightening cycle of an additional 50-75 basis points. In reality the 10-year fell in yield trading as low as 1.45% in early September. Currently the 10-year is yielding about 1.75%. The overnight rate was lowered by 0.75%.
Bloomberg is now writing the 10-year is expected to rise to a 2.10% yield in 2020 as global economic growth solidifies. The overnight rate should remain stable at around 1.50%–1.75%.
As noted several times 2019 has been the year of the unexpected. Will 2020 be a continuation?
I must write macro economically the 2019 forecast of 1.5%-1.75% GDP growth, 2.0% inflation and 3.5% unemployment rate was generally achieved it was the response to the potential impact of the trade war that was not anticipated in November 2018. The markets discounted the trade war, a discounting that was not appropriate based upon the actual events of 2019.
Will 2020 be a rewind of 2019, defined as the markets discount stronger than expected growth? If the trade war was indeed the epicenter of economic angst and this angst is no longer present, should not the inverse occurs?
Many times I have written inflationary growth is associated with negative real interest rates, an event that only occurs 0.3% of the time. The odds of negative interest rates are 0.001%. If I were a politician I would write that it is a proven scientific fact, that it is scientifically settled, negative interest rates could not occur. [Note: Nothing is ever proven by science. Science only states the odds of an event occurring based upon redundancy of an outcome based on a similar process…it is only the arrogant or ignorant that uses such phrases]
2019 everyone became a Treasury yield expert declaratively stating a recession will unequivocally occur because of the inverted slope. Today nothing is remotely discussed of past dogmatic declarations.
How will the markets respond if yields do rise back to 3.0%? Will volatility rise? As noted many times I think the greatest issue the markets are facing is the lack of liquidity. Market stabilizing mechanisms have been obliterated by regulatory fiat, passive investing and technology based trading that disappears in times of stress.
What will happen today?
Tomorrow is Thanksgiving. There is so much to be thankful for. Ignore the endless political and social engineering chatter and focus on what is important. I am certain that if one begins to write down all the good stuff in one’s life that list could easily morph into pages.
Last night the foreign markets were up. London was up 0.46%, Paris up 0.03% and Frankfurt up 0.28%. China was down 0.12%, Japan up 0.28% and Hang Sang up 0.15%.
The Dow should open quiet and should become quieter as the day progresses ahead of what is really a 4 day weekend. The 10-year is off 1/32 to yield 1.75%.