Risk Watch: US Treasury Yields Spikes!

``A page of history is worth a volume of logic.” Oliver Wendell Holmes

However, looking at risks equation we note that technical variables could be indicative of a short term overbought signal for the US markets.

Given that the US markets have provided leadership in today’s global markets, any pause in the US markets are likely to influence global markets (including the Phisix). This will all depend on the degree of the pause or correction.

And so goes with the US dollar, which at the present seems wavering onto its future directions. A stronger US dollar could weigh in on ex-US dollar capital flows.

Further, the jump in US Treasury yields to close in on its July 2006 at 5.2% likewise renders us of some risks to monitor. US Treasury yields climbed 9.5 basis points to 4.956% over the week.

As you know global central banks particularly that of the OECD have been in a rate hiking or tightening mode on mostly inflation (consumer prices) concerns. The present increase in US treasuries in the face of a weakening GDP (first quarter GDP .6% below consensus estimate), is a potential harbinger of rising rates, as shown in Figure 5. And rising rates in the light of an economic slowdown imperils the stock market momentum by signaling declining liquidity.

Figure 5: Economagic: US Interest rates and the S & P 500

The Fed Rates (red line) have frequently “tailed” the actions of the US 10 year treasuries (blue line).

Further, notice that the stock market boom seen in the US, as represented by the benchmark S & P 500 (green line), has been inversely correlated to the declining interest rates by both the US 10 year yields and the Fed rates from 1980 up to the present. Prior to the 1980, as interest rates spiked markets consolidated.

In other words, the long term picture tells us that if rising interest will be the long term feature of then US markets then, returns are unlikely to be as good as is today.

Mr. David Kotok of the Cumberland Advisors says (emphasis mine)``four central banks now control the policy rates for 95% of the world’s international bonds and nearly all of its international commerce and financial markets. It is good to know the rules under which each of them operates.” The four banks include the Bank of England and Japan, the Fed and the ECB.

In short, the effects of interest rate movements would have different impacts on each distinct markets.

We will be watching.