Ricks Picks

Rising Yields Are About to Wipe the Stupid Grin Off Wall Street’s Face


Interest rates have risen to levels where they are finally getting noticed, even on giddy Wall Street and in the undiscerning precincts of television business news. In recent days, nasty selloffs in the stock market have been attributed to correspondingly large leaps in Treasury yields. The move since late August has been unusually steep. The Ten-Year Note hit 3.25% on Monday, up from  2.83% just five weeks earlier, while the 30-Year reached 3.42%, up from 2.98% during the same period. Rick’s Picks was well ahead of this economically threatening development with a bearish call and a 3.11% target for the 10-Year that went out to subscribers in 2017 when rates were hovering around 2.54%. The 3.11% target was precisely achieved in mid-May, and at the time, we expected it to mark an important top. But the subsequent pullback was so obviously corrective that we raised our targets to levels that lie not far above today’s peaks. With this edition of The Morning Line, however, we are raising the targets yet again to, respectively, 3.59% on the long bond and 3.47% on the T-Note.

Why Yields Ar Rising

The upward pressure on rates is being caused by several factors. For one, the Fed has reduced its borrowing and ‘tapered’ its balance sheet by selling Treasury debt on the open market.  In addition, the U.S. economy has been strong, CPI inflation, at 2.9%, has risen significantly since a year ago, commodity prices have recently firmed, and foreigners, most particularly China, have been dishoarding U.S. paper.

We’ve long expected that the higher rates we were predicting would choke off the economic boom and cause stocks to fall. The latter effect has taken longer than we’d anticipated and required an in-Wall-Street’s-face breakout in yields to get the message across to bubbleheaded portfolio managers. It remains to be seen whether yields will go high enough to put the U.S. economy in recession. Regardless, we expect the rate rise to be self-limiting, since it will reduce the economic activity that causes yields to move higher in the first place. Mortgage borrowing is already sluggish because the housing sector has peaked, and money managers will be buying more bonds at the long end of the yield curve as the bonds’ higher returns make them more attractive relative to stocks. Economic slowdowns gathering force in Europe and China will further suppress the rise in rates and suck some of the hot air from America’s boom.  Under the circumstances, we would expect the 3.47% and 3.59% targets given above to mark the top of the bull market in yields begun in the summer of 2016.

Comments on this entry are closed.

John Jay October 9, 2018, 11:53 am

Hard to tell what the hell is actually going on with any market!
There is so much intervention, and outright fraud that we have the financial version of a John Belushi Speedball.

The Fed has not sold off all that much, considering the size of the bond market:
And who knows if they actually sold off anything at all. Lots of evidence they use Straw Men all the time.
Crude oil, Gold, Silver, etc. lots of evidence of manipulation there.
As I have argued before there is not an honest set of books being kept in our Solar System!

If I remember correctly, part of the impetus to the 1987 crash was a Trade Deficit that came in at 10 billion dollars for the month!
That would be cause for celebration today!

Anyway, there is at least some chance that the Fed raising rates is just another Deep State assault on the Trump administration.

The older I become, the more I have learned to ignore the who, what, why, and just follow the footprints the Players leave on a chart!
As the saying goes, “The sun rises and sets everyday, whether you worship it or curse at it!”
I am trying hard to go Cold Turkey on my lifelong obsession with current events!
But the old ways always die hard!

Rick Ackerman October 9, 2018, 3:02 pm

I’ve thought about the cold-turkey thing myself, wondering if there might be any money in hand-delivering 1950s reprint editions of Grit to America’s neighborhood. The interesting thing is that gruesome stories from the local police blotter were just as numerous then — have always been with us. Just that they were not published in Grit.

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