Another Friday Down Day

It looks like the period of calm may be coming to an end and the storm may be looming just over the horizon. The Dow Jones finished down today, just over 200 points off the day’s low.  I think I saw us down about 280.  This was the 4th consecutive Friday where the markets were lower – there was a holiday in there (Good Friday) – it has been 5 Fridays.  This seems to be a trend.  The markets still managed to eke out a gain on the week.  All 3 of the major indexes managed gains despite the losses on Friday.

 

Investors Should Really Worry about the Bond Market

What should really be worrying investors are the losses this week in the bond market. Yields continue to ratchet up almost every day, and in fact we closed at the high point all across the curve, from the 2-year all the way up to the 30-year.  The 1–year yield, which is the one everybody seems to be talking about closed at 2.96%.  So this is a new high for the year.  You’ve got to go back to pre-2008 financial crisis to get a yield up that high.  But the yield is still very very low.

Who Believes that 3% Yields are Here to Stay?

The amazing thing is to look at the 30-year. The 30-year is 3.15.  It’s actually just under 20 basis points – 19 basis points is all you get for taking 20 additional years of interest rate and inflation risk.  Think about that! Think about how crazy that is. Interest rates right now on the 10-year are just under 3%; on the 30-year they are slightly above 3%.  Why would anybody believe that 3% yields are here to stay?

Low Rates Are an Aberration

Obviously, if you go back to the post-war period and look at what rates have averaged on the 10-year, these low rates are an aberration.  They’ve been going on now, for a while, but they can’t go on forever, Yet the market thinks it’s going to go on for another 30 years.  If you think about a 30-year bond, that’s like buying a 10-year bond today, holding it for 10 years, letting it mature, then buying another 10-year bond, holding that one for 10 years, letting it mature and buying another one! So you do that 3 times over 30 years, in theory it should give us the same rate as buying one 30-year bond right now.