What Are 30-Year Yields Suggesting? An Update
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On March 2nd I presented a chart with commentary of 30yr Treasury yields that emphasized the long-term trend of yields continually moving lower over the last 18 years (see What Are U.S. Treasury Yields Suggesting?). The following charts are updates of the March 2nd chart. The 'M-Top' that I mentioned back in March remains in place as yields have eroded from its neck-line, while the bear pennant that I suggested has evolved into an apparent bear flag.
I continue to believe investors should not discount a continued Treasury rally with accompanying lower yields. Yields will eventually move higher, but they may continue lower first, possibly for an extended period. If the global economy is to truly emerge from the doldrums, demand for goods and services must eventually surpass the equilibrium point as measured against the established capacity; otherwise, I remain leery of a Japan-like liquidity trap with economic stagnation continuing until the deleveraging and economic contraction processes are completed.
The continued 'flight-to-quality' for U.S. Treasuries was most recently confirmed yet again. The world is still running to the U.S. for safe-haven. No matter what you think about U.S. fiscal prospects, that is the current trend. I think it will continue. In addition, in regard to more accommodation by the Fed, we may get it if markets fall further, but I don't think any further quantitative easing directed toward Treasuries will have a significant impact on lowering yields. I instead believe that if Treasury yields do indeed move lower, it will be the result of a continued 'flight-to-quality' because of global economic turmoil (e.g. European stresses or hard landing in China), or because of continued deflationary forces associated with the de-leveraging process, both of which are conditions that are not stock friendly.
Finally, consider this. With the 10yr yielding below 2% and the 30yr below 3%, there is no urgent need for more low-interest rate-accommodation: Interest rates are already extremely low. If you combine that thought with the notion that the Fed delivers more accommodation when the stock market struggles, it may follow that the Fed is finally running out of bullets. If the market continues south currently, will they actually try to be supportive of even lower rates? How low do interest rates need to go before demand can be stimulated? Perhaps those thoughts in their simple form confirm the liquidity trap that I fear.
Chief Investment Strategist
Preferred Planning Concepts
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