The long Treas. yield % took quite a ride up in 2013. The sharp part of the ride happened
from May into Sep. and corresponded to the interval when the Fed signaled that a tapering
of its large QE 3 program might well be in the cards. Right on the heels of the Fed's first
taper indication came a strong acceleration of purchasing managers' new order data which
not only signaled faster economic growth but encouraged bond players to start to plan for
a period ahead when liquidity would be withdrawn, and, further on, the beginnings of a
rise in short term interest rates as well.
From mid - 2012 until now, the full spectrum yield curve (30yr Treas. % - 3 mo. Treas. %)
rose from a moderate 260 basis points to nearly 400 basis points. We do not often see such
a steep yield curve. It occurs when investors anticipate a marked acceleration of economic
growth and eventual rises in both the T- bill % and inflation.
Interestingly, a fast upturn in the slope of the yield curve to such a high level as 400 bp.
often signals an overshoot in the bond yield and a subsequent moderation in the yield %.
When the long T yield goes to a large premium to its 40 wk m/a or develops a 20% or better
% premium on a 52 wk ROC% basis, the Treasury market is often setting up for a rally in
prices and a drop in yields. Since Sep. of last year, both premiums have been undergoing
a work off via a stabilization of the long Treas. yield. $TYX Chart So, no sharp fall in the
yield yet as the chart shows.
The chart also reveals the Long T % is quite extended relative to the primary yield uptrend
band which emerged after mid - 2012. The spread now is 3.20% at the low end and 3.80%
at the top. This leaves substantial room for a nice long T price rally if the recent pick - up in
growth moderates in the coming few months. Something to think about.
The chart has two other panels -- industrial metal prices and the SPX. Note how nicely the
$TYX lined up with the $GYX until this year, when the bond market began to ignore the
movement of sensitive materials prices which, by the way, happens but rarely. The bond %
is running well ahead of the industrial economy. Note also that the SPX has tended to trend
up with the long bond yield. The SPX has been using the long T% as a leading economic
indicator during this economic recovery period. If you are more of an equities person, you
might want to carefully watch the Treasury market as a falling yield may well signal a return
to 'risk off" and a sloppier stock market.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!