Treasury yields are ripping higher. For a few days, we have seen significant "un-flattening" in what I would label a "bear steepener". That is , yields are rising, with the long end rising more. Here is the chart that has everyone talking.
10-Year Treasury Yields
There are at least a dozen ways to draw the trendline. I put it there because Bond yields just hit the level that Bill Gross said would signify a bear market.
"If 2.6 percent is broken on the upside ... a secular bear bond market has begun," Gross told investors in his monthly letter in January. "Watch the 2.6 percent level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important than dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock prices in 2017."
"You Bet Your Heinie"
Hedge fund heavyweight David Tepper appeared Wednesday on CNBC and, when asked whether he was short bonds, said, "You bet your heinie."
In Hoisington Management's 4th Quarter Economic Overview, Lacy Hunt made this observation:
"The full spectrum of monetary policy is aligned against stronger growth in 2018. A higher federal funds rate, the continuation of QT, low velocity and abruptly slowing money growth all put downward pressure on growth. The flatter yield curve will further tighten monetary conditions. This monetary environment coupled with a heavily indebted economy, a low-saving consumer and well-known existing conditions of poor demographics suggest 2018 will bring economic disappointments. Inflation will subside along with growth causing lower long-term Treasury yields."
Treasury Yields 1998-Present
I saw some comments yesterday that the 30-year long bond was flirting with the upper trendline.
Is it? Which one of those dotted lines is correct?
I suggest both are. Arguably the best way to draw trendlines over long periods of time is with a very fat crayon.
Looking again at the first chart, if 2.6% on the 10-year was significant, then so was every other point I circled.
I side with Lacy Hunt even though the yield curve is no longer flattening at the moment.
Comparisons to 2008
This reminds me of 2008 when oil soared to $147 and everyone thought inflation was headed to the moon. I could see the housing bust coming and commented "I expect record low yields across the entire US treasury yield curve."
Oil prices once again are distorting the inflation outlook. And the notion that Trump tax cuts are going to fuel a GDP boom is more than a bit presumptuous.
What Happens if Stocks Sink?
The market is well beyond the froth stage as noted in Investors Abandon Hedges: Who Needs Em? The Stock Market Only Goes Up
Some expect a final melt-up. Others don't. See Hussman Questions Grantham's "Melt-Up" Thesis for discussion.
Either way, this recovery is already long in the tooth. Any significant downturn in stocks is likely to result in bond yields crashing.
Bill Gross is Short Bonds
Bill Gross, now at Janus, proclaimed today the bond bull market is over and he is short bonds.
Bill Miller told CNBC's Closing Bell yesterday "Those 10-year yields go through 2.6 percent and head towards 3 percent, I think we could have the kind of melt-up we had in 2013, where we had the market go up 30 percent. If we can get the 10-year towards that 3 percent level, you'll see the same thing."
Fatter Crayon Needed
Mike "Mish" Shedlock