Shazam! That was the magical incantation which Billy Batson used to turn into Captain Marvel in the old comic books.
3%! That’s the yield on the ten-year Treasury note that makes fully grown investors almost faint. It’s the opposite of Shazam, capable of turning the Incredible Hulk back into David Banner or Superman into Clark Kent.
On Wednesday, the yield on the ten year closed above 3% (it has slipped back under since) for the first time since the days dinosaurs roamed the earth. Oh, wait, it was just 4 1/2 years ago, and after that, yields tumbled again, hitting their all-time lows of 1.36% in July 2016.
Investors are not taking the news well. The Dow Jones Industrial Average lost 700 points before rallying a bit and the S&P 500 lost 2.7%. Serious-sounding pundits proclaimed the end of the 35-year bull market in bonds is at hand.
So, are there reasons to worry?
No, not really, although vigilance and concern are always a good idea.
First of all, as I said before, we’ve been at 3% pretty recently and yields subsequently fell.
Second, this is much more likely the result of a stronger economy than deep fears of accelerated inflation and higher interest rates. On Friday, the Commerce Department reported that GDP rose at a 2.3% annual rate in the first quarter.
That sounds low, and it is, but the first quarter is notoriously, seasonally weak, and subsequent quarters should show a much better performance. At the Society of American Business Editors and Writers (SABEW) conference in Washington, D.C., which I’m attending, Kevin Hassett, chair of the president’s Council of Economic Advisers, said capital spending was particularly strong in the first quarter, which should propel growth higher in the months ahead.
Third, inflation at or above the Federal Reserve’s target of 2% has yet to rear its head, and almost nobody’s looking for a federal funds rate above 2.25% this year.
So, again, this is the result of an economy and rates that are returning to normal after the extremely weak growth and extraordinarily loose monetary policy that followed the Great Recession.
But we’ve gotten used to the lower growth and ultra-low interest rates and even getting back to below where we were in previous cycles will take a big adjustment in psychology. Fixating on “magic” numbers like 3% yield won’t help.
“There is no magic number,” a strategist for Bank of America Merrill Lynch said on CNBC this morning.
She’s right. Shazam!