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Death Valley and Bond Yields - October 22, 2018

Death Valley is in California. Besides its reputation for summertime temperatures of 120 degrees, it’s also known as the lowest spot in the USA – 282 feet below sea level. Following the recession in 2008-09, the yield on the 10-year Treasury took a trip to Death Valley, falling to just 1.37% in July 2016 (St. Louis Federal Reserve). Put another way, you could lend Uncle Sam cash for 10 years and earn 1.37% per year.

As Figure 1 illustrates, the yield was the lowest in over 100 years. In fact, July’s bottom is the lowest in the history of the Republic, according to BofA Merrill Lynch. Notably, the spike in yields in the 1970s was an anomaly when viewed from a long-term perceptive.

10 22 18 treasury yield

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The Anatomy of an 831-Point Decline - October 15, 2018

The Dow Jones Industrials fell 831 points, or 3.3%, on Wednesday (WSJ). Thursday saw a 546-point drop. A 1,175-point decline (4.6%) on February 5, followed by a 1,032-point drop (4.2%) on February 8, are the largest (St Louis Federal Reserve).

10 15 18 index

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831 Point Drop in the Dow (3.1%) - October 11, 2018

The fundamentals really do matter (until they don't).

1. The economy is expanding at a solid pace; recent data have been strong.
2. Q1 and Q2 profits were strong and Q3 is looking very upbeat
3. Inflation isn't showing signs of accelerating.
4. Interest rates remain low (10-year Treasury at levels not seen since the late 1950s, excluding recent years).

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Treasury Yields and Stock Market Performance - October 10, 2018

The yield on the 10-year Treasury bond is approaching 3.25% (MarketWatch), the highest since May 2011 (St. Louis Federal Reserve).

The recent spike in Treasury yields has created modest volatility in the major market averages, though the Dow Jones Industrial Avg1 remains near its peak.

How do rising and falling Treasury yields impact stocks? A recent study that reviews monthly changes in the 10-year yield and the S&P 500 Index2 from April 1953–June 2013 sheds some light.

Monthly S&P 500 performance in rising and declining yield environments

No. of months Avg monthly S&P 500 return
10-Year Yield Down 347 1.38%
10-Year Yield up 358 0.63%
All 722 0.94%

Source: S&P Dow Jones Indices: Much Ado About Interest Rates. Data through June 2013. Charts are provided for illustrative purposes. Past performance is no guarantee of future results.

  • Historically, rising yields have hindered performance.

  • The study also revealed that sharp increases in yields were most negative for stocks. Moderate increases in yields didn’t detract from performance.

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