Interest Rates

If you want to know why the markets sold off pretty hard yesterday then look above at the primary culprit.  Here I'm showing a chart representing the current interest rate on the 10-year US treasury bond. Interest rates have taken a big push higher all year but have really taken a considerable move higher in the past few weeks.  We're now back at interest rate levels we haven't seen in years.  We've gone from roughly 2.90% in early September to over 3.20% now.  Folks that's a pretty big move in a short period of time and stocks are going to notice this.  The reason this is important is that risk free money {and despite all you've heard investors still consider US debt pretty solid} now yields you north of 3% and that's competition for stocks.

Now that doesn't mean that stock prices can't go higher in the coming months.  I remember many years when rates were higher than now and stocks managed to advance.  However, it does present a headwind that wasn't in the picture a year ago.  Savers can rejoice though because they can now actually get paid something on their cash.

Here's what those two pink lines on the chart mean and both indicate a higher probability that rates will grind higher in the coming months.  The trend line that slopes downward left to right on the chart  is one that traces part of the multi-decade downward decline in rates that's been in place since the 1980s.  That trend was broken at the beginning of this year and sure enough rates have climbed through all of 2018.  The horizontal line traces out one of the next major levels of resistance for rates.  The trend of rates moving up and the likelihood of the Federal Reserve raising interest rates at least two times in 2019 means there is a higher probability that interest rates will move closer to 4% on the 10-year bond in the coming months.  Not saying that will happen, just that there's a higher probability that sort of move could occur.

Chart is from Tradingview.com although the annotations are mine.  Also you can double-click on the chart to make it larger.

Back Tuesday.