The Treasury yield curve has steepened significantly in the last couple weeks, as bond investors sold because of fears of higher inflation in the future. The Federal Reserve continues to pump an excess of “stimulus” into the financial markets via their asset purchases and by pinning short term interest rates essentially to zero. The Federal government is pouring more “stimulus” into the economy via Covid Relief bills. Together this is pushing the yield curve to the steepest (biggest difference between short-term and long-term interest rates) it has been for five years. Here is a look at the recent pricing of 30-year treasury bonds:
The new $1.9 trillion Covid Relief Bill that was passed in Congress has accelerated the sentiment in the bond market that inflation will be a concern in coming months/years therefore bond prices should be lower and interest rates should be higher. The bill is loaded with “pork barrel” spending for DC politicians’ cronies and the vast majority of the spending is not directly related to Covid -19 issues. Much of the funds are strategically allotted to where it would not even be spent in 2021.To call it a “Covid-Aid” package is such a misrepresentation reality that it is comical (but of course sad.)
Bond prices bounced back some on Friday (Feb 26th.) This is likely due to speculative money buying back treasury bonds on the thoughts that the $1.9 trillion Covid-Aid bill will not get passed by the Senate. We will be pleasantly surprised if 51 senators actually show some respect for the American taxpayers and bondholders and vote against it passing.
The stock market did sell off a bit last week with fears of interest rates going higher. Historically, high growth stocks (NASDAQ) sell off more in higher interest rate times and that is exactly what has happened this go around. Some big-name tech stocks like Facebook and Amazon pulled nearly 10% off of their recent highs. In a conversation with a mutual fund manager last week, we asked what interest rate would make them want to be more conservative in their stock portfolio allocations. They referenced the ten-year treasury rate and said that consensus in the mutual fund world is that a 3% rate on the ten year would be concerning.
Obviously, we are a long way from 3% right now, but we have it on our radar. The ten-year rate did however, breach 1.5% for the first time in more than a year before backing off to just over 1.4%. Mortgage interest rates bounced a little higher last week as well, so that may help cool off a red hot residential real estate market. Keep in mind, though that the Fed has committed to purchasing mortgage-backed securities which should keep a limit on mortgage rates going drastically higher. Hopefully if interest rates continue higher it will be representative of a stronger economy rather than just fear that our leadership in DC continues to disappoint with financial profligacy.
Regards and good investing!