Treasury yields

Treasury yields have a large impact on the Macro economy since they influence bond rates at all durations, which in turn influences mortage rates and the stock market. Treasury yields fluctuate from day to day, but this article looks at the near-to-medium term.

In a free credit market (when the Federal Reserve is not distorting yields by massive money creation and bond buying) it’s normal for yields to rise when the economy is strengthening. A stronger economy would be a good sign for stock prices. It’s also normal for bond investors to demand higher yields when inflation is expected to remain high for the long term. The 5-Year, 5-Year Forward Inflation Expectation Rate has been range-bound at about 2.4% for the past year so the bond market apparently believes that 2022’s inflation spike won’t last 5 years. Prolonged inflation has been bad for the stock market in the past.

https://fred.stlouisfed.org/series/T5YIFR

https://www.wsj.com/articles/treasury-yields-rise-on-bet-tha…

**Treasury Yields Rise on Bet That Recovery Will Last Longer**
**Bond prices have slipped, a sign of investor optimism regarding the economy before the Jackson Hole retreat**
**By Sam Goldfarb, The Wall Street Journal, Aug. 25, 2022**

**U.S. government-bond yields have staged a major rebound this month, reflecting increased optimism among investors about the near-term economic outlook....**

**The good news on headline inflation and caution from Fed officials have, for investors, only lowered the chances that the central bank will raise rates so aggressively in the short term that they would have to start cutting them immediately [due to causing a recession]....** [end quote]

Here’s an interesting forecasting site that uses AI (their own black box algorithms) for several important market variables. Their forecast of 3.73% for the 10 year Treasury in November is higher than the 3.5% high in mid-June 2022. The early 2022 stock market slump coincided with the rise in the bond yields and reversed when yields started to subside in mid-June.

https://www.forecasts.org/10yrT.htm

https://fred.stlouisfed.org/series/DGS10

The real (inflation-adjusted) yields of these bonds is negative and will have to rise if inflation does not subside. Anyone who thinks that inflation will stay higher than 2.5% for the long term should buy TIPS, not Treasuries, and hold to maturity to retain principal. Bond fund NAVs would sink.

Data that will swing the bond and stock market are Jerome Powell’s comments on Friday at the Woods Hole convention, the inflation rates for August and September, and the Fed’s action on the fed funds rate in September.

Meanwhile, the 30 year mortgage has climbed to 5.55%, compared with 2.87% a year ago. It’s no wonder the housing market has slowed.
https://fred.stlouisfed.org/series/MORTGAGE30US

Wendy

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and the man has spoken…

FOMC thinks 2.5% (where we are now) is appropriate long term but to get inflation in control they will be relentless in raising further.
One month of lessening inflation; lessening wage growth not enough.

BTW someone here said food prices coming down…not true.
July Food away from home +7.6% YoY; Food at home +13.1%

Food and Rent are two items being watched. Energy decrease only balanced increases elsewhere.

https://www.bls.gov/news.release/cpi.nr0.htm

In any case TLT (20+ year bond ETF) looks to have bottomed (price down / high yield) in June with stocks. It made a run in July with stock rally but a local peak 1-Aug has led to higher rates again. TLT looks to have locally bottomed again after the Powell speech.

My ? What is the bond market; USDollar; and Oil Price sniffing out?

In any case Powell, alluding as you did to the '70’s, said they want to avoid those mistakes - reversing tightening too early.

https://www.investors.com/news/economy/fed-chair-powells-spe…

Joe
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Treasury yields have a large impact on the Macro economy since they influence bond rates at all durations, which in turn influences mortage rates and the stock market. Treasury yields fluctuate from day to day, but this article looks at the near-to-medium term.

Wendy,

More directly the rising and falling rates change the calculations of IRR.

adding…

real rates do not need to be positive to slow the economy. As measures of the internal rates of return decline with higher interest rates corporate returns fall.

You can use this graph to look at current yield curve or the curve for any date. Don’t know how far back the data goes. Today I was interested to review the yield curve on 11/08/2021, my personal investing day of infamy when I decreased my % cash significantly when the CNN fear/greed was nearly pegged to the max.

KC

3 Likes

That’s a nice find.

DB2

Thank you for sharing this Treasury yield curve.

This is the yield curve I use.

Notice the SPX chart on the right. At the extreme right is a vertical red line. Grab this red line with your cursor and slide it to the left. This lets you see the movement of the yield curve at the same time as the fluctuations in SPX.
Wendy