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Bond yields appear to be at a crossroads.
At 2.83%, the 10-Year Treasury yield is now at its highest level in over four years. It is also at the upper end of a downtrend channel that has been in place since the mid-1980s.
The question all investors are asking: will yields finally break on through to the other side?
If economic growth and inflation are going to increase as expected from here, a continued rise in yields would seem likely.
But the better question perhaps is whether investors should welcome or fear such an outcome.
In the past 30 years, there have been a number of inflection points in the chart above where yields failed to break higher. These include:
At the opposite end of the spectrum, there have been a number of inflection points where yields failed to break lower. These include:
From these examples it appears that the failure in yields to push higher at inflection points was a more ominous sign than had they continued higher. For such a failure preceded economic weakness in 1990, 2000, and 2007 and a market crash in 1987.
While the recent decline in the equity markets is being blamed in large part on the rise in yields, there is little evidence historically showing that rising rates are necessarily bad for equities. In fact, just the opposite appears to be the case, with the S&P 500 actually outperforming on average in years in which 10-year Treasury yields have risen (see full post on this topic here).
To be sure, there have been times when equities have fallen in a rising rate environment, most notably during the 1973-74 recessionary bear market when rising inflation was of great concern. But in the past 30 years, it has more often been the opposite outcome (sharply falling rates) that signaled problems for equities.
So perhaps yields breaking on through to the other side wouldn’t be the worst thing after all.
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Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.
In 2017, Charlie was named the StockTwits Person of the Year. He is a frequent contributor to Yahoo Finance and has been interviewed on CNBC, Bloomberg, and Fox Business.
You can follow Charlie on twitter here.
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The Standard & Poor’s 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.
10-Year Treasury yield is the return on investment, expressed as a percentage, on the U.S. government’s debt obligations with a 10-year maturity.
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