Another Rising Rates Set-Up?
2-Year Treasury Yields rose to a 5 ½-year high today…but we’ve seen these “break-outs” many times the past few years.
In light of the much stronger than expected rise in Non-Farm Payrolls today, the 2-Year Treasury Yield rose to its highest level – 0.9% – in 5 ½ years. The last time the Yield was this high was 2 days before the May 2010 stock market “Flash Crash”.
This has prompted many observers to pencil in a rate hike at the next Fed meeting in December. This “break-out” in short-term rates is finally ushering in the long-awaited “rising rates” environment, some say. That all may be true – but we’ve seen this movie before.
Indeed, since the 2-Year dropped below 1% permanently in May 2010, there have been plenty of fits and starts. However, here we are more than 5 years later with rates at their highest level – but still less than 1%. Just a few months ago, in fact, the 2-Year Yield broke out to new 4-year highs. We issued the same warning at the time, however, to not get one’s “rising rates” expectations too high. Sure enough, rates did an about-face and dropped back down immediately.
We will concede that the 2-Year has been forming higher lows since the pre-”taper tantrum” lows in mid-2013. They just have not gone anywhere in earnest. In fact, despite the modest rise off their lows of a few years ago, they are still below any other level in recorded history prior to 2008.
The other counter to the “rising rates” argument pertains to the longer-end of the curve. A look at the reaction of the 30-Year Yield to today’s jobs report reveals that it rose sharply, all the way up to – the September highs. That dose of sarcasm is meant to drive home the point that, in a rising rates environment, rates should actually…rise. Sure, the longer-end is much less-sensitive to a Fed rate hike, and perhaps that is indeed on tap. However, perhaps we also should not lose sight of the fact that longer-term rates are still showing lower highs over every conceivable time frame longer than 1 month.
Lastly, and we are not economists (thank God for that), but today’s NFP report seemed a bit out of character relative to most of the other economic data that has come in recently. Yes, we hope it is closer to economic reality than the other data. However, as money managers, we are used to taking a comprehensive and objective view of things. And through that lens, it is difficult to see the positive economic spin, based on one outlying report, that would change the minds of the til-now dovish Fed members (by the way, we wish they would raise rates, for the benefit of a much larger swathe of the population than that which is the reaping the low-rate benefits now).
OK, that’s enough economics for us. Just a public service announcement if you are leaning heavily towards a new “rising rate” regime: watch out that Lucy doesn’t yank that football away again. Have a good weekend.
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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
