A Rare Down Day
The U.S. stock market finally had a rare down day today. The Dow Jones was down almost 180 points. We did have a little bit of a rally off the lows. NASDAQ closed down 39 points. But still, it’s rare to see the U.S. stock market going down. Supposedly, the catalyst for the sell-off today was the increase in long-term interest rates. Long-term interest rates have been rising steadily all year, so the market hasn’t cared about rising interest rates at all this year, so I don’t know why today is any different. The yield on the 10-year bond moved above 2.7% This is not quite a 4-year high in yields; the high was 2.725%.
Why Buy Treasuries at All?
That’s the 10-year. The yield on the 30-year is at 2.943. Why would anybody buy a 30-year treasury for 2.93%. You could just buy a 10-year for 2.7. Twenty extra years of interest rate and inflation risk? Why would somebody assume that for a 20 basis point in yield? To me, it doesn’t make sense that anyone would buy any Treasury, regardless of the duration.
Why Hasn’t the Yield Curve Already Blown Out?
But if you are going to buy a long-term Treasury, why on earth would you go for 30 years? Just buy a 10-year. The yield is almost the same. But if we get a big increase in interest rates, the collapse in the value of the 30-year is going to be much bigger than the 1o-year. In fact, that seems to be a pretty good trade for a spread trader. Buy the 1o-year and short the 30-year. That spread has got to widen. That extra 20 years of inflation risk and interest rate risk is going to come back to bite anybody who is buying a 30-year treasury. So it doesn’t even make any sense to me why the yield curve hasn’t already blown out. It’s going to happen. It’s only a matter of time.
If Anyone Cared, The Drop Would Have Bigger
I don’t think the markets are worried about higher interest rates. The Dow is down 170 points. That’s nothing. If anyone was actually worried about higher interest rates, we would have had a much bigger drop. Who knows why the market was down – that’s the excuse, but it can’t be rates, because this has been happening consistently and nobody has cared. If anybody cared, we would have had a much bigger drop in the stock market.