Ten-Year Yields Go Up, Up and Away


This was the week we found out which way the yield on the ten-year Treasury note is going: Up!

For the last several weeks, the yield on the benchmark Treasury note has pushed up against the 3% barrier a few times, only to quickly slide back to as low as 2.72% on April 2nd. Bond yields rise when prices fall (and fall when bond prices rise), so the up-and-down moves suggested investors were engaged in a tug of war over which direction it will ultimately go.

When markets can’t resolve the struggle between bulls and bears, technicians look for key inflection points—resistance at the top of a trading range, support at the bottom—that telegraph decisive moves either way.

The 3% yield on the ten year Treasury was such a resistance point. This week, it blew right through that hard barrier and all the way up to 3.11% on Thursday. Not only was that much higher than its previous high of 3% back in December 2013; the fact that the ten year stayed well above 3% for the last couple of days (its closing yield Friday was 3.07%) suggests its rise is a keeper.

So, why is it happening and what does it mean?

Economic growth, for one, is picking up, especially in the U.S., where Ian Shepherdson of Pantheon Macroeconomics thinks GDP growth could hit 5%–that’s right, 5%!—in the second quarter.

That would be a bit of an anomaly—it’s based on technical factors, a rebound from a very weak second quarter last year. And it would be sandwiched in between tepid first quarter and what’s expected to be a subpar third quarter. Overall U.S. GDP growth should still come in at just below 3% for all of 2018.

But capital spending is roaring back. Businesses haven’t been investing in their own plant and equipment for years, but now the new tax cuts have given them an unexpected windfall. They can’t put all of it into share buybacks and extra dividends, so they’re beginning to upgrade their facilities. By some measures, cap spending is up 25% year over year, and growth in that area will probably continue for the rest of 2018.

Capital spending eventually translates into greater productivity and higher GDP growth. That’s causing the dollar to strengthen as investors think the Federal Reserve may raise rates quicker than expected. That’s why they’re also selling bonds, causing yields to rise.

I’ve written that I wouldn’t be surprised to see the yield on the ten-year Treasury move up to 3.25-3.5%. We’ll keep monitoring these moves in the bond market and will alert you if and when it requires changes in your investing plan.