10 Treasury Yields

Stocks and Bonds

Stocks and bonds and their interplay has been muted for many years due to all of the worldwide quantitative easing programs. With muted inflation and a large buying program from the Fed, volatility in the bond complex has been artificially low during this time. A recipe for a sleepy bond trading environment and good for borrowers but this relationship looks to be transitioning.

How will the Fed handle this change? The Fed is now facing an economy with pent-up demand and the potential for rising inflation as consumers have money to spend (see savings rates below). The Congressional testimony from Fed Chair Powell this week was very guarded regarding policy questions that could affect the deficit. Exploding deficits can affect interest rates so it looked to me as though he is concerned about what is going to happen to the yield curve when consumers start spending again.

As I posted last week in Interest rates in the Spotlight, the stock market is going to pay more attention to the yield curve which is what happened on Thursday. Not only did 10Yr yields continue rising but there was a 7Yr Treasury auction that went very poorly as dealers got stuck with 40% of the auction.

The chart below shows the 10Yr Treasury yield which has gone vertical over the last few weeks. It did look like on Friday that oversold levels brought in some buyers so we may see some consolidation next week. However, I do expect to see the 10Yr closer to 2%+ in the coming months.

For the S&P 500, February was a positive month but the last few sessions erased half the gains as you can see in the chart below. The equity volatility was due to the yield curve so the interplay between stocks and bonds will be something to watch for the remainder of 2021.

Chart of the Week!

As a result of early efforts to secure vaccine candidates, a quick approval progress by authorities and effective infrastructure for administration, some governments are already racing ahead in their efforts to start mass vaccination against Covid-19.

Economic & Central Banking Snippets 

Household Income
  • Household income rose 10% in January, the Commerce Department said on Friday. The increase was the second largest on record, eclipsed only by last April’s gain when the initial round of pandemic-relief payments were issued. Household income has also risen 13% since February 2020 and total savings now amount to $3.9 trillion. (WSJ)
  • US GDP could grow in 2021 by the most in decades, New York Fed President John Williams said. Strong stimulus and continued vaccinations stand to supercharge the nation’s economic rebound, he added. Still, he warned that minorities and low-earners face a tougher return to pre-pandemic employment. (280 Securities)
  • The U.S. housing market got off to a strong start in 2021. Sales of newly built-single family homes rose 4.3% in January from a month earlier. One potential damper on the market: Mortgage rates reached their highest level since last November which is cooling home purchase and refinance applications. Also, the months of supply remains low at 4.0 while the median home price is up 5.3% compared to 2020.
New Homes and 10Yr Interest Rates
  • South Korea said that exports of semiconductors in February rose a healthy 16.7% compared to 2020. A sign that global trade is getting back on track.

Macro Snippets

  • Central banks from Asia to Europe escalated their efforts to calm panicking markets this week by pledging to buy more bonds and signal additional policy accommodation after U.S. Treasury yields surged. The Reserve Bank of Australia waded in with more than $2 billion of unscheduled purchases, while Korea announced buying plans for the next few months. European Central Bank Executive Board member Isabel Schnabel said more stimulus could be added if the surge in yields hurts growth.
  • The number of publicly traded companies is rising after a two-decade slump. Last year’s increase in the number of companies listed on U.S. exchanges was the largest since the late-1990s. The total is expected to rise in 2021 and perhaps set a new record. (WSJ)
  • The Depository Trust & Clearing Corp. (DTCC) has issued a white paper that outlines how it could cut the settlement cycle for securities to one day within two years. Cutting down settlements time by one day will provide reduced costs, less market risk and lower margin requirements. (FT)
  • AT&T plans to spin out its U.S. video business into a new company where it will have a 70% ownership stake with private equity firm TPG Capital. The new company will own DirecTV, AT&T TV and U-verse at a valuation of $16.25B – a fraction of the $48.5B that AT&T paid for DirectTV in 2015. 
  • Beyond Meat reported Q4 results that missed expectations, however, the company did announce strategic agreements with Yum! Brands and McDonald’s. The company will co-create menu items for KFC, Pizza Hut, Taco Bell and be the preferred supplier for the patty in the McPlant, a new plant-based burger being tested by McDonalds.
Corn & Soybean Prices
  • U.S. farmers are expected to plant a record amount of acres this year to take advantage of high agricultural prices. The U.S. Department of Agriculture projects that farmers will plant 182 million acres of corn and soybeans in 2021. That is an all-time high and up roughly eight million acres from last year. Prices have been lifted by surging demand for U.S. soybeans in China, where the country continues to rebuild a hog herd that was decimated by African swine fever in 2019. As of last week, Chinese buyers have purchased 35.9 million tons of U.S. soybeans since the start of September which is an increase of 24 million tons from the same period a year earlier.

That is all for now and thank you for being a subscriber!

Paul J. McCarthy


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.