I would be remiss in my duties if I failed to point out that this recent run up in yields — fundamental explanation here — occurred a few short months after the cover of BusinessWeek declared: It’s A Low, Low, Low, Low-Rate World
Back in November, I was walking by a magazine stand in Grand Central Station when that red cover caught my eye (a lesser hue might have gone unnoticed). Its a fair rule to assume I stop and look at pretty much any magazine cover that is either bright red or has Jessica Biel on the cover.
Since the aforementioned Biel was not on the cover of this particular magazine cover, it led to this post: Uh-Oh: It’s A Low, Low, Low, Low-Rate World.
Other folks prefer more quantifiable basis for announcing their expectations of higher rates in public. Some rely on signs of a inflation, others choose to read the entrails of Fed meetings.
Chartist Michael Kahn, makes The Technical Case for Higher Rates in
In Barron’s Online:
"The 30-year Treasury
yield has moved above the 5% level to notch a 10-month high and
technically, it has already confirmed the end of a 13-year trend of
declining interest rates.
The benchmark 10-year yield is threatening a breakout of its own, too.
The major trend in interest rates has been down for
the past three decades. This generational, or secular,
move helped fuel the great bull market in stocks as corporations and
equities typically do well when interest rates fall. But as the chart
shows, the trendline that guided rates lower is now under attack."
Kahn suggests that itss too soon to "declare a
generational rising trend in interest rates. Nonetheless, chartists
still note that a major change in the 30-year yield has occurred."
graphic courtesy of Barron’s
And this morning, Mike Santoli argues in The 5% Dilemma that "during this bull market
of four-plus years, stock indexes have made essentially no upside
progress in periods when the 10-year yield has been above 4.75% or so.
Stock valuations and M&A deal premiums, in this context, will be
crimped at lower rates than we became accustomed to in the prior decade."
However, do not assume that the 5%+ yields means the Bull just rolls over and dies.
"Moving beyond the history lessons, though, there are
some encouraging aspects of the markets’ action that suggest that this
pullback in stocks (partially reversed with Friday’s rally) is probably
not the Big One, so to speak.
First is the fact that rising rates, which went
unnoticed for weeks, have now become overexposed as a news story and a
focal point of market commentary. From the headline-commanding comments
of Pimco’s Bill Gross (risk of 6.5% 10-years within five years) to the
popular insistence that higher rates, at last, will bring the buyout
boom to its Waterloo, this cacophony hints that stocks are in the
process of discounting this story.
The other key sub-surface element to the bond
selloff is that it wasn’t accompanied by accelerating inflation
expectations or carnage in the corporate-bond arena. Market-implied
inflation forecasts have remained tame, and corporate-bond yields
haven’t risen nearly as fast as Treasuries. Corporate-bond spreads
still seem too tight to the naked eye, but they have been a good
indicator of general economic risk and liquidity for stocks."
Well said, and logical. But all I can say is: "Long Live the Magazine Cover Indicator!"
UPDATE: June 10, 2007 7:37am
Note that Barron’s Randall Forsyth also noticed the coincidence of the mag cover and the recent interest rate spike:
Four months ago, Business Week’s
cover proclaimed "It’s a Low, Low, Low, Low-Rate World," and that it
would stay that way. Since then, the benchmark Treasury 10-year note
edged down to around 4.50% — near the low end of its trading range
over the past year — in March before jumping to nearly 5.25% by
Friday, which marked the high end. Moreover, almost all of that rise
has come in the past month or so.
John Roque, Natexis Bleichroder’s technical analyst, says a close for the 10-year note above 5.25% would point to a target of 6.10%. "If yield were a stock, we’d be buying any pullback we could."
In other words, sell bonds.
The Technical Case for Higher Rates
Barron’s, June 6, 2007
The 5% Dilemma
Barron’s, June 11, 2007
RANDALL W. FORSYTH
BARRON’S, June 11, 2007