10-Year Yield Is The "Tell"

March 22, 2014

2014 has been a real barn burner of a year for stocks so far.

Down a tad, up a bit. Down a chunk, up a sliver. Down for two days, up for a few weeks. Here's what that noise looks like and you can take a guess at what's likely next.

Beyond this sideways slop, the first five days of trading suggest all of this will resolve down, but the real tell on stocks is found in the safety of bonds.

So long as the 10-year is up on the year with rates in rally mode, all of that sideways commotion in stocks is not just noise but one big yawn.

This is especially true in the context of Janet Yellen's  supposed mistake. 

Something tells me Ms. Yellen doesn't do random nor does she make mistakes. That's just not how someone becomes one of the top five most powerful people in the world. 

Being able to pull of the illusion of a mistake, however, is exactly how someone becomes the head of the Fed. And if it was a mistake, all the power to her new smokescreen.

​Either way, if the 10-year yield isn't going to spike back above 3.00% on the combination of a $30 billion tapered monthly bond-buying program and some sort of time frame for when the Fed may formally start to raise interest rates, this suggests rates are less in the grip of policy and more in the grasp of a preference for safety.

And this is especially true considering that this year's rally in rates started two weeks after the initiation of the taper and exactly the opposite of what "should" have occurred or a defined and lasting move back above the historically low 3.00%.

In turn, this suggests there are some smart and market-moving investors who think the Fed's attempt to pullback on its accommodation is likely to cause market gyrations that warrant stepping back from the edge of the risk curve

That the 10-year yield is still down more than 25 bps on the year tells us those investors have not changed their mind and are continuing to favor safe haven assets including the yen and gold too.

Put otherwise, so long as the 10-year yield is below about 3.00%, bonds are telling us there are some investors who are willing to forego the diminishing possibility of higher stock market returns as they prepare to take advantage of what may prove to be a period of bearish volatility for stocks.

It is for this reason that the 10-year yield is the "tell" on stocks.

As always, thank you for taking the time to catch up on my thinking.


Courtesy of http://www.peaktheories.com

Spanish Conquistadores invaded the Inca Empire in 1528 to steal their silver and gold.