10-Year T-Yield At Crucial Support – Breakdown Opens Door For 2%

Bonds and stocks diverged for a couple of months before beginning to move hand in hand this month. The former is not buying the enthusiasm shown by the latter. The 10-year T-yield currently sits at decade-old support. A breakdown will be telling.

Early October last year, US stocks and long-term Treasury yields peaked together. The S&P 500 large-cap index then lost 20 percent before bottoming late December, even as the 10-year Treasury rate contracted by 70 basis points by early January.

From that late-December low, the S&P 500 took off; the 10-year yield, however, more or less went sideways (Chart 1). It was a case of stocks waxing enthusiastic but bonds not falling for it. Last week, they moved in tandem – both to the downside.

Bonds are probably focused more on fundamentals than stocks.

The US economy is in deceleration. February’s ISM manufacturing index fell 2.4 points month-over-month to 54.2 – a 27-month low. Also in February, only 20,000 non-farm jobs were created, even as average hourly earnings jumped 3.4 percent year-over-year.

As of last Friday, the Atlanta Fed’s GDPNow model is forecasting 0.5-percent growth in 1Q19. Three more weeks remain in the current quarter. If the final number is anything even remotely close, this would represent a massive deceleration from last year’s pace. The economy expanded 2.9 percent in 2018. That said, with a 4.2-percent pace in 2Q to 2.6 percent in 4Q, deceleration was evident last year.

More importantly, post-Great Recession, growth has been mediocre. Between 3Q09 and 4Q18, the economy averaged growth of 2.3 percent, much slower than the long-term average of 3.2 percent going all the way back to 2Q47 (Chart 2). Even more importantly, it is taking a substantial increase in leverage to produce this growth.

Chart 3 calculates annual increase in both real GDP and federal debt.

Until 2000, there were several years in which GDP grew more than debt. Then, things went the other way. Debt began growing faster, with acceleration in the pace post-Great Recession. In 2008 and 2009, the economy contracted, even as federal debt picked up speed. The sharp increase in debt was understandable given the bad shape the economy was in at the time. But the trend did not reverse even after recovery took hold – it has been nearly a decade since the last recession ended. In 2018, the federal government added $1.6 trillion to its debt pile, and real GDP only grew by $520.6 billion.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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