10Yr & 30Yr Yield Curves

Bull Market

The Bull Market rolled on this week as the pullback to the March 4th low at 3720 was put in the rearview mirror. The S&P didn’t close at a new high this week but the momentum in the stock market looks to continue into next week or longer.

Chart of the S&P 500 Futures

The bond market was in the spotlight this week as three bond auctions took place this week that were closely watched by fund managers. The auctions for 10s/30s had the most anxiety around them and the results were “ok” so there was no clear signal with the results. The trading on Friday resulted in yields closing at the highs and pushing on points of technical resistance as you can see in the charts below. Rising interest rates in an economic recovery is normal but if it happens too quickly then equity markets can get nervous.

Chart of 10s & 30s.

How far can yields rise? I expect that 10Yrs will trade above 2% at some point this year (1.635% Friday close). However, the U.S. yield curve is very attractive right now for Japanese and Eurozone fund managers as their yield curves are trading at negative returns. Even after the cost of currency hedging, the 1.63% yield on a U.S. 10Yr bond can net them over 1% which is the most in several years. The chart from the WSJ below shows how much more attractive U.S. Treasuries are right now for overseas investors.

Yield of U.S. Government Bonds

Part of this relationship is due to the steepness of the yield curve. As overseas investors buy U.S. Treasury bonds they hedge with currency swaps which are tied to the cost of a 3-month T-Bill which yields a measly 0.03%. So, hedging costs for non-dollar investors are minimal when the curve continues to steepen.

U.S. Treasury bond yields net of hedging.

At some point, these investors will come in and put a stop to the rise in U.S. yields with buy programs but that is not happening yet. The good news is that the stock market traded well on Friday despite the higher yields which is a good sign for continued higher prices in the equity market.

Chart of the Week!

Statistica: $1.9T Stimulus Bill

Economic & Central Banking Snippets 

  • Initial jobless claims came in at +712k this week which was slightly lower than expectations but still a very high level historically speaking. As cities and states re-open their economies, we should see this number drop in the coming weeks.
U.S. CPI Data
  • The CPI in February rose .4% from January which was in-line with expectations. The core rate was up 1.3% verses last year. The main driver of recent price increases have been due to higher gas and food prices.
  • The February PPI saw a monthly gain of 0.5% headline and 0.2% core which was reported as expected. Compared to last year, PPI is now +2.8% and +2.5%, respectively. This inflation metric shows that companies are experiencing inflation in their cost to produce goods. These higher prices will eventually be transmitted to end buyers (consumers).
  • The European Central Bank will speed up bond purchases in an effort to prop up a sluggish economy. The ECB claims the recent rise in Euro bond yields reflect higher growth expectations in the U.S. rather than Europe. However, the ECB is being coy as there are high levels of debt in many member countries which leaves them extremely vulnerable to rising borrowing costs. To contain yields, the ECB will significantly accelerate purchases under a €1.85 trillion bond-buying program, equivalent to $2.2 trillion.
U.S. Household Net Worth
  • The net worth of U.S. households finished 2020 at the highest level on record, as soaring prices for stocks, real estate and other assets erased losses inflicted by the coronavirus pandemic and related economic downturn. Household net worth is up 5.6% from the third quarter and 10% from the end of 2019. Rising net worth is contributing to an increasingly optimistic outlook for the economy’s recovery prospects this year. (WSJ)

Macro Snippets

  • Disney+ has crossed 100 million global paid subscribers just 16 months after its launch. The company made the announcement during its annual shareholder meeting. It targets 100+ new titles per year and expects to reach 230-260 million subscribers by 2024. (Investopedia)
  • Coupang, South Korea’s biggest e-commerce website, set the record for biggest U.S. IPO so far in 2021 when it raised $4.6 billion on Thursday. (Investopedia)
  • General Electric is winding down GE Capital after agreeing to merge its jet-leasing unit, the biggest remaining piece of GE Capital, with rival AerCap in a deal worth more than $30 billion. The deal will create a leasing giant with more than 2,000 aircraft and an additional 500 on order, which could intensify long-simmering competition between lessors and plane makers trying to secure orders from carriers. (WSJ)
  • Americans used their homes as piggy banks during the pandemic through cash-out refinancing. U.S. homeowners cashed out $152.7 billion in home equity last year, a 42% increase from 2019 and the most since 2007, according to mortgage-finance giant Freddie Mac. Homeowners had more equity available as home prices rose during the Covid-19 recession, an unusual development during a recession. (WSJ)
Total Cash-Out refinance activity in the mortgage market.
Paul J. McCarthy III

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

Regards,

Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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