In today’s broad stock market decline it looks like yields on the 10-year US Treasury Note and 30- year US Treasury are falling. This type of action is common in yields when stocks fall, investors generally run into bonds for safety. But how safe are bonds with the U.S. debt in the stratosphere? After all, the national debt is now approaching $29 trillion and counting. Eventually, you must get paid something in order to take on the risk of holding U.S. Debt.
The Federal Reserve (central bank) has been the biggest buyer of U.S debt for a long time now. The central bank currently buys $120 billion dollars worth of U.S Treasuries and mortgage backed securities. Will this ever stop? The Fed has hinted at a potential tapering of asset purchases, but that is hard to imagine since the time never seems to be right for them. As we all know, asset purchases by the central bank have been the biggest tailwind for the rising stock market. They have basically back stopped the stock market and kept it from falling. Just think about it, until today it has been over 10 months since the S&P 500 Index (SPY, SPX) has even pulled back by 5.0%. This is not normal nor healthy for the stock market.
Today, yields on the 10-year US treasury note are now lower by 0.68 basis point to 1.302%. There is a good chance that yields could ultimately decline down to the 1.0% level, but that should be about it. The marketplace will likely force the Fed’s hand as yields should start to rise. Now please understand, this will take some time to play out, but once the upside in yields catches momentum it can jump higher quickly. The current pattern on the charts suggest a move to around 2.50% on the 10-year US Treasury Note yield. Please remember, in the short term we should see one more dip in yields before the upside begins.
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