December 2020: Market Valuation, Inflation And Treasury Yields

PE GS10 Scatter

In the months following the Great Financial Crisis, we have essentially been in "uncharted" territory. Never in history have we had 20+ P/E10 ratios with yields below 2.5%. The latest monthly average of daily closes on the 10-year yield is at 0.93%, which is above its all-time monthly average low. As of August 4, 2020, the daily 10-year note hit an all-time low of 0.52%.

What can we conclude? We have been in "uncharted" territory. Despite the end of QE, many analysts assume that Fed intervention through its Zero Interest Rate Policy (ZIRP), will keep yields in the basement for a prolonged period, thus continuing to promote a risk-on skew to investment strategies despite weak fundamentals.

On the other hand, we could see a negative market reaction to a growing sense that Fed intervention may have its downside, resulting in an aberrant bond market and increased inflation/deflation risk.

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Disclosure: None.

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