Higher long-term volatility lurks in widening spread of interest rate forecasts

Higher long-term volatility lurks in widening spread of interest rate forecasts

Today Goldman Sachs projected that the yield on the Treasury 10-year note will climb as high as 3.5% in the next six months. In addition, the Wall Street giant told Bloomberg, the U.S. Federal Reserve will raise rates four times in 2018. The yield on the 10-year Treasury finished at 2.85% yesterday after trading as high as 2.89%, a four-year high.

So what will the Fed do now about interest rates?

So what will the Fed do now about interest rates?

Once upon a time, before the U.S. stock market moved into an actual correction and before bond yields spiked, the Federal Reserve was clearly on track to raise short-term interest rates at its March 21 meeting. The debate in the financial markets was about whether the Fed would increase its benchmark interest rate three or four times in 2018. But then we got tax cuts piled on top of spending increases.

The financial markets are in shock at Washington’s debt plans

The financial markets are in shock at Washington’s debt plans

Notice that the signing of a bill early this morning to keep the government open and to fund operations for two years hasn’t resulted in a serious rally in either stocks or bonds. And mind you, this deal also “solves” the debt ceiling crisis by suspending the debt ceiling until March 2019. That passes for statesman-like foresight in Washington these days and this certainly counts as good news. So why no big upside move on these events?

Forget about stability–bond fears driving stocks lower again

Where do bond yields matter?

If you needed a lesson in the complex and sometimes frustratingly perverse bond market, you got one yesterday, Monday February 6. Stocks went to hell in a hand basket and bonds, which had been selling off, rallied on a classic flight to safety. Bond yields, rather than rising (which means bond prices are falling) actually retreated on that surge of demand with the yield on the 10-year Treasury falling a massive (for the Treasury market) 14 basis points to 2.71% from 2.85% the day before. (It takes 100 basis points to equal a percentage point.) That marked a disappointing debut to my position in my Volatility Portfolio in the ProShares Short 7-10 Year Treasury ETF (TBX), which fell 0.72% on the day. I suppose that’s better than taking a 4.1% loss in the Standard & Poor’s 500 stock index on the day, but, honestly, the point of this hedge was to make money not simply to lose less of it.

S&P 500 erases its gains for 2018; with index down 4.1% today, Wall Street looking for 10% drop from 2018 high

S&P 500 erases its gains for 2018; with index down 4.1% today, Wall Street looking for 10% drop from 2018 high

Is this starting to get serious? Wall Street still doesn’t think so. With the Standard & Poor’s 500 down 7.8% from its 2018 high, Wall Street continues to look for a 10% total decline. Which would mean that we’re way closer to the bottom than the top. Reasons for this relative optimism on a day when the Dow Jones Industrial Average fell 4.6% or 1175 points include: A drop in the yield on the 10-year Treasury to 2.71% today. That’s 14 basis points lower than yesterday (which means bond prices are higher.) If one reason for the market’s tumble is higher yields and the fear of higher yields yet ahead, then this pull back in yields on the 10-year Treasury should be supportive to stock prices.

Price tag for keeping the government open: $500 billion added to deficit

The next BIG test for the debt markets: Tuesday’s auction of Treasury bills

We won’t know exactly how much four-week Treasury paper the government will try to sell on Tuesday until Monday, but we already know that the short-term Treasury market is in trouble. With Congress still fighting over a bill to extend funding to keep the government open past the February 8 deadline, there’s not even a credible effort to raise the ceiling on what the government can borrow.