Treasury Yields & SPX

Interest rates rallied to a new 10-month high yesterday. The yield on the 30-year Treasury bond surged to 4.64% – breaking above its December high and beginning a new move higher (and they are higher again today). 


Remember, as interest rates move higher, bond prices move lower. So, just about everyone who bought long-term bonds in the past two years is now underwater on the trade. This includes mom and pop investors who piled into the long bond at record-low interest rates last August; foreign countries like China, India and Japan, which need to do something with their trade surplus dollars ( and they are actually dumping these as fast as they can); and our own Federal Reserve.


Think about this… not only is our government running trillion-dollar deficits because the folks in Washington can't stop spending, but the Fed – through its quantitative easing program – is investing the borrowed money in our very own Treasury bonds, which are losing value almost daily.

Borrowing money to buy bad investments! Tell me is that what you would do, who would loan you the money, would any bank? But the Government can electronically manufacture dollars (Look at the $DXY). Were it not for problems in Japan and Europe the Dollar would be in much worse shape and as those countries fix their problems and we just keep printing, the dollar will plummet, there is no end in sight to the money printing, Its amazing. 

Once again you won't hear anyone on CNBC talking about this, and the fund managers have to put money somewhere, cheap money has to find a home ($CCI is at all time record high's and its doing it without gold or other metals, what inflation). The S&P 500 closed at a new 52-week high on Tuesday. It's up 3% so far in 2011, and up 15% since long-term interest rates started to rise last September.

"You have to be bullish," argue the cheerleaders on Bloomberg and CNBC, cant fight the FED or the third year of the presidential cycle, now can you"


For those that are Perma Bulls, please take note; there have been two other times in recent market history when long-term interest rates rose dramatically. Both occurred during the third year of a presidential election cycle. One was in 1999, when the yield on the 20-year Treasury bond rose 21% between April and December. Stocks peaked three months later.

The other time was in 1987. The 30-year yield rose 21% between April and August. The stock market crashed two months later.

A similar rise this time would put the 30-year yield somewhere around 4.90%. I think if your are bullish on US equities you might wanna get a little cautious. If the yield rises above 4.90%, it will equal the moves we saw in interest rates back in 1999 and 1987. Both periods were followed by sharply lower stock prices.


Happy trading!