Rising US 10 year treasury yields are creating volatility in stocks.
As Darren Winters points out, the last time US Treasury 10 Year yields climbed so steeply was during the beginning of the 2020 pandemic lockdowns.
So the three-month US Treasury 10-year note chart, courtesy of MarketWatch, shows the steeping of the yield curve, particularly since the beginning of the year.
Rising US 10 year treasury yields signify a risk-off sentiment and are a yardstick of future inflation ahead
When bond investors think more inflation is ahead, they sell bonds, which sends the price of the bonds lower and its corresponding yields higher.
But as treasury investors sell their treasuries on the bond market that has pushed the US 10 year treasury yields to decade highs.
Rising treasury yields have a real implication on the economy
As bond investors factor in a hawkish Fed interest rate hike owning bonds with a long maturity, such as the US 10 Year treasury becomes less attractive.
So as bond investors sell their long-maturity Treasuries the yields need to rise to attract investors into bonds with long maturity.
But rising treasury yields, particularly 10-year treasury yields, also increase the cost of servicing debt. The 10-year yield is equally a proxy for mortgage rates. Treasury yields are also viewed as a way of gauging investor sentiment about the economy.
A slowing economy implies sluggish sales, and low employment, which increase the risk of loan defaults. So lenders demand interest rates on loans to compensate for the higher risk of loan default. In short, the Treasury 10-year yields are a yardstick used by lenders to set interest rates, as the treasury yields rise, so do an array of loans to households and businesses.
Rising treasury 10 Year yields increase the cost of servicing mortgage payments, auto loans, and other personal loans
Rising treasury yields are a headwind on economic activity
Darren Winters explains, nearly every big-ticket item is financed with credit, whether it be real estate purchases, financing the purchase of a new car. Most of these transactions would not take place without the availability of affordable credit.
Rising treasury yields for investors dampen risk appetite
The rising cost of servicing debt often spells the end of Zombie companies. These are businesses that don’t make profits but survive on cheap credit. When the cheap credit stops, these are the first companies to go bankrupt.
So rising yields often trigger a rotation of capital flows from growth to value stocks. These are companies trading at a lower price relative to fundamentals, such as dividends versus earnings.
But under a state capitalist system, the largest lender in the economy is not necessarily households or businesses, it is the government.
The US public deficit is expected to hit 30 trillion US dollars by the first quarter of 2022 and the cost of servicing, just paying the interest on the debt, is already 422 billion US dollars, according to the US debt clock.
Those figures are based on an accommodative monetary policy which entails keeping Fed fund rates near record lows and buying treasuries to surprise yields.
So now you understand why the Fed, the world’s central bank by default, will continue to downplay inflation. They’ll continue to cook the books and pamper the core inflation figures. The CPI index was 6.8% for November, but the figure could be in the mid-teens.
The role of a modern central banker is like an actor on a stage, where he or she will pretend and extend as the system transitions into a surveillance state capitalism.
So the Fed will target 10-year yields at near 2% by extending their bond purchase program.
Yields can not go much higher; the burden of just servicing the US Federal Government is almost half a trillion US dollars.
So, similar was the talk of transitory inflation, which was soon withdrawn, so too is the talk of quantitative tightening.
We see QE continuing, which will finance Universal Basic Income UBI administered through Central Bank Digital Currency (CBDC) as the macro trend of declining worker participation rates continues.
The greatest revolution of the century will be pushing the technological boundaries of electric vehicles to autonomous vehicles. We are on the cusp of this technological breakthrough that we will see in this decade.
But automation using artificial intelligence means the end of at least four million jobs.
Super technology companies valued in the trillions of dollars will become the new cash cows for investors as they rent out their software, the machines’ brain, by the millions.
Look to invest in software companies building a real-time operating system for autonomous vehicles with advanced cybersecurity.
We like BlackBerry (BB) as it has already established itself as a cybersecurity company with top notch clients and is making headway to become industry standard real time operating systems for autos.
Computer code could be the new currency.
So the rising yields will be suppressed, the central banks will continue to play down inflation fears. But in a long enough period, everything is transient, including inflation. If trucks become driverless, then the cost of bringing goods to market falls. In other words, technology is deflationary.