Heads I Win, Tails You Lose

The Week Ahead

April 30, 2018

Investors’ reactions to rising long term yields makes the process seem like a game of “heads I win, tails you lose.” When the Fed’s short term rate hikes were failing to send 10-year yields much higher, the pessimists worried that the flattening yield curve was a dangerous signpost of an upcoming recession. Now that 10-year rates have “soared” to 3%, the worry warts are pointing to the drag on growth from these higher yields as a risk to the economy and equity markets.

Some perspective here please. The yield curve was flat in no small measure because the Fed, the ECB and the Bank of Japan had used QE programs to drain the market of supply, with the very intention of depressing longer term rates.

And now the climb to 3% on 10-year Treasury yields doesn’t put the economy, or the stock market in peril by historical standards. If inflation is expected to average 2% over that horizon, then we are talking about a real rate of merely 1%. Hardly a crisis for those of us with memories going back more than a handful of years.

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