The Yield Curve Rises

Finanza Operativa di Finanza Operativa 14 Marzo 2018 | 13:00

A cura di Walter Snyder, Swiss Financial Consulting
       Statistics are what statisticians make them. Some numbers are more difficult to manipulate. That is why the yield on the ten-year Treasury note is an important number and charts illustrating the yield over a period of time are useful in determining the weighting of assets in a portfolio. The yield is currently 2.87% and very recently was as high as 2.94%. This figure is raw data, and statisticians cannot manipulate it. It is what it is.
Several market observers think that a 3% yield on ten-year Treasuries will mark the point when asset managers begin to realign portfolios, shifting from overweighting in favor of equities towards fixed income, that is, bonds. David Stockman thinks that the ten-year yield could go as high as 4%-5% with 2.5%-3% for real yield and 2% for inflation.
Of course, the yield on ten-year Treasuries is not the only thing that should be taken into account. The very high valuations of US stocks not only means a high P/E ratio, but also limitations on future profits. If equity prices are already extremely high, investors should ask themselves how much higher can stocks go. Optimists have reckoned that the S & P could go as high as 3,200 and presently 3,000 is not far away from the quotes that have marked a 5% recovery from the recent correction, namely, 2,786. FOMO (Fear Of Missing Out) pushes investors to stay in so that they do not miss out on a bull market, but the conclusion is that stocks are not going to go much higher.
More and more very well-informed people foresee market turbulence if not in 2018 then certainly in 2019. As the Treasury will have to offer higher interest rates on notes in order to attract capital, equities will suffer at a certain point.  It is now obvious that the bond market will be overwhelmed by the Treasury`s need to finance deficits and roll over existing debt when the Fed`s QT programme accelerates. The monetization of the debt that the Fed will have to promote will result in a weaker dollar. Investors and traders who have prepared for this massive market shift will be able to protect themselves against the rising volatility, share price drops and a dynamic bond market.
  It is highly probable that gold will benefit from this turbulence though it is also likely that the BIS and central banks will do what they can to depress the gold price by means of market manipulation. It is however highly unlikely that any central bankers will go to jail even though that is where some of them belong.

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