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Treasury Snapshot: Where Are Yields Headed in 2015?

  • Written by Syndicated Publisher No Comments Comments
    December 30, 2014

    With the third round of Quantitative Easing behind us and the first FOMC meeting of 2015 a month away, let’s take a quick look at US Treasuries. The yields on the 10-, 20- and 30 year Treasuries have generally trended downward since the end of 2013. They hit their 2014 lows on December 16th, the day before the latest FOMC statement was released. The 10-year Note is up 18 bps since its low that day. The 20- and 30-year Bonds are up 14 and 12 bps, respectively.

    Will rates trend higher in 2015? The prospect of Fed tightening next year would logically reinforce expectations of higher yields. On the other hand, a global disinflationary trend for the general price of goods could thwart expectations of a Fed hike and lead yields lower. The price of Crude Oil could be a significant factor in the months ahead.

    A log-scale snapshot of the 10-year yield offers a more accurate view of the relative change over time. Here is a long look since 1965, starting well before the 1973 Oil Embargo that triggered the era of “stagflation” (economic stagnation with inflation). I’ve drawn a trendline (the red one) connecting the interim highs following those stagflationary years. The red line starts with the 1987 closing high on the Friday before the notorious Black Monday market crash. The S&P 500 fell 5.16% that Friday and 20.47% on Black Monday.

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    The dashed lines on the chart above were provided by my friend and mentor Bob Bronson of Bronson Capital Markets Research. Bob comments:

    “The blue dashed lines are much more closely parallel to the all-data, log-linear best fit line – very similar to the high-low mid-channel line – since 1980. Then there is the even more currently relevant downtrend (black dashed line) since the 2007 high.”

    The 30-Year Fixed Rate Mortgage

    Here is a long look back, courtesy of a FRED graph, of the Freddie Mac weekly survey on the 30-year fixed mortgage, which began in May of 1976.

    A Perspective on Yields Since 2007

    The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed’s website for the FFR.

    Click to View
    Click for a larger image

    Now let’s see the 10-year against the S&P 500 with some notes on Federal Reserve intervention. Fed policy has been a major influence on market behavior.

    Click to View
    Click for a larger image

    For a long-term view of weekly Treasury yields, also focusing on the 10-year, see my Treasury Yields in Perspective, which I update on weekends.

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.
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