Image source: Wikipedia
 

 — The answer is not complex and the reason for the tick upward in this rate is positive–a return of confidence. 

— The role of the ten-year in many investment eco-systems

— Lack of nuance in today’s crudely-programmed AI trading systems and media without perspective are at fault.

Plain talk on yesterday’s’s reversal

The 10-year US Treasury note is obviously an income producing asset where the investor is guaranteed by the United States Government to get a predictable return over a ten year period at the end of which they will get back the exact amount of dollars that they invested (not necessarily same value if you adjust for inflation). They are tradable, liquid and, for some, viewed as a safe haven in troubled times.In uncertain or troubled economic times they become “flight to safety” vehicles. Investors park money in these notes because of the guarantee and return features listed above and they are highly marketable. When they are bought en masse for safety their prices are pushed up and their yields come down.

For about an hour Tuesday, March 3, 2020, as a foreboding darkness consumed the markets with investors trying to get their arms around the implications of the pandemic, the 10-year traded up in price and down in yield to .91%. Buyers came out of the woodwork going after the safety of principle but not necessarily the return that they offered. Safety was the paramount concern. In hindsight this kind of panic  represented a terrific opportunity to buy equities.

Recently, after spending some time below 4% due to Fed easing, the yield has popped back over 4% … currently at 4.037″ The recent low yield was 3.58%, according to FactSet Data. That nearly 46 basis point increase happened in less than a month and has many confused. Like weren’t rates supposed to be going down?

This really is not that surprising nor should it be viewed as anything but a positive. The point: if you buy ten-year governments when fearful, when your confidence returns you sell them and buy riskier assets, maybe stocks. In my way of processing it’s not about a change in monetary policy or inflation, it is about a return of confidence.   

The historic investment role of the ten-year

Back in the day, long before I got into the investment business, there was a macro tactic: if concerned about the economy, you buy secure bonds (and utilities) and sell industrials and rails. When you felt better about the economy, you’d reverse the trade … risk off and risk on. What we saw today seems reminiscent of that old tactic without the money being reinvested immediately. It is simply an addition to buying power. It is bullish (a sign of perceived economic strength) and not the beginning of tragedy.

Lack of nuance in AI trading systems at fault

As you can see in the example above there may be good reasons for certain interest rates to rise including a stronger economy, lower short-term rates and a renewed preference for risk assets. But these are nuances the average computer trading regime is not set up parse. It has been reported that somewhere that between 60% and 70% trading in today’s market is computer-algorithmic generated. When the algo picks up anything dealing with higher rates it flashes negative for stocks. The computers go into sell mode. Ergo, this 45 basis point increase we have seen over less than a month becomes a trigger … bad things are about to happen. 

One other factor about nuance. It is people programming this primitive AI who may lack nuance in their investment perspective, so we get GIGO … Garbage In and Garbage Out.

The media, in its complete lack of perspective, then jumps on the bandwagon and we have broad-based, possibly unnecessary, weakness. I have been talking about this phenomenon of higher rates being a harbinger of good things to come (a strong economy) since March of 2013, Kort Session 15–“FBFH—Fed Bolt From Hell”—The Next Big Thing!

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