— A flight to safety … the yield on the 10-year treasury drops 15% in two weeks in a raging bull market.

Unsplash

— For some investors (computerized or not) fears of higher interest rates and inflation trump a rip-roaring economy with a tankful of fiscal stimulus and easy monetary policy as far as the eye can see.

— This attempt of some to beat the Fed to a distant punch is a welcome sign that the ‘wall of worry’ is very much intact.

— Corrections and bear markets lie ahead. They always do and they are hard to predict. I’m just not sure the time is right to load up on 10-year T-notes yielding 1.455%.

The Flight to Safety (may not be so safe)

Photo by Samuel Penn

The flight to safety  (that may not be that safe)represented in the rush to buy the US Treasury 10-year was a very contrary indicator versus the daily new highs being set in the stock market. The folks at CNBC have taken note because it presages something bad happening and that appears to be their life’s blood. You know. Bad news sells.

“10-year Treasury yield falls as investors digest Fed decision” (11/4/21)

“10-year Treasury yield falls even after strong jobs report” (11/5/21)

Wait a minute! This is not supposed to happen. The Fed meeting just finalized the end of Quantitative Easing, the Fed’s bond and collateralized mortgage backed securities buying spree. Rates are supposed to go up … right?

As we have discussed ad infinitum in kortsessions.com, QE was an emergency measure taken on after the financial crisis in 2009 and it was reintroduced during the pandemic (The Big Lie about the end of QE). I will repeat QE … was an emergency measure.  There is no emergency. The tapering of QE will not represent a tightening of Fed credit policy. 

The current Federal Funds rate is 0 to .25%. It has been that way since the beginning of the pandemic. It was set at that level because of emergency. There is no emergency! Yet according to recent pronouncements from the Fed, there is no proposal to begin raising the Fed Funds rate for at least the next 12 months. Admittedly this may change and certainly could change in light of higher trending inflation, growing inflation that could be more secular than the Fed’s short-term pronouncements might lead you to believe. This would not be surprising nor the end of the world as these low rates would not be consistent with with a strong, vibrant (non-emergency) US economy.

With this bull market registering new all-time highs for every major index last week it is very hard for me to square last Friday’s plunge in the 10-year yield, 7 basis points (-15% since 10-21-21) with the facts stated above. My overarching opinion is that the ‘wall of worry’ is still very much intact and that augurs well for the market.

Rate fears trump a rip-roaring economy

Photo by Vadim Bogulov

This is in part due to a continuous stream of misinformation and negative bias provided by the media. A stellar example of this came on September 21, when Mike Wilson, Morgan Stanley’s chief US equity strategist, made the pronouncement that a 20 percent correction had become a real possibility. His prophecy went viral. It was all over the media. Of course the market proved him wrong (as it has often done), moving to a series of new all-time highs in the following month. At the time Wilson said fair value on the S&P 500 was about 4000. It closed last Friday at 4697. Wilson was not alone in this call. There was a choir of strategists all calling for significant pullbacks in mid September.

Here’s the solo from the tenor:“Cramer advises investors to sell stocks, says it’s too soon to consider buying the September slide.”

Sept 20, 2021

I will never understand this propensity on the part of many Wall Street types and pundits to try to predict the unpredictable, essentially falling on their own swords to make one great call. Predicting is hard with timing and magnitude, impossible. 

Meanwhile, the economy is rips and roars. 3Q earnings continue to come in great, the employment picture brightens, stimulus continues to flow and recirculate and the Fed is really not doing anything to get in the way.

The attempt to beat the Fed to the punch

Photo by Thao Le Hoang

I see last week’s Treasury interest rate rally as attempt, based on headline risk and negative pundit pronouncements, to beat the Fed to the punch, a punch that may not come for several years. In my way of thinking the tapering of QE is an absolute non-event … not a punch. And if the Fed is the reason for this move, not some black swan event that is about to drive us into the abyss, it represents thought process done with a complete lack of understanding of the impact of Fed policy.  This goes for investors placing these trades as well as those who program computer algorithms to enter these trades. As an aside, many of these so-called investors are probably being led to this faulty thought process by uninformed media.

Corrections and bear markets lie ahead!

They always do. This bull market will be no exception. These pitfalls are hard to predict. I just don’t believe, based on the weight of the evidence, that we should be reciting the prayers for the dead on this one. I also believe that if inflation, Fed tightening and higher interest rates are on the way that the best place to hide may not be in the 10-year US treasury note (SPTL). To me it is a flight to safety that is not so safe. It might just be that common stocks (once known to be inflation hedges) are the safest place to hide.