More Thoughts on the 10-Year Treasury by ToddSullivan, ValuePlays

Treasury Yeilds

“Davidson” submits:

10-Year treasury rates fall. Is it due to fear of Russia invasion of Ukraine or is this short covering activity or is this simply stronger US$?

I don’t think one can sort out all the various short term influences. Could be any one or all of these combined. Bottom line is that the 10yr Treas has a 50yr+ history of return vs US GDP and it matches RGDP.

Yes, Real GDP return is the long term net return, i.e. net of inflation, of 10-Year Treasury debt.

The return of 10-Year Treasury rates to historical returns

Taking into consideration that the US has not really shifted from its RGDP of ~3%(recent RGDP trends are Private Economy growing ~3.5% while that attributed to Government had been falling at ~2.2%), we should see the 10-Year Treasury rates return to historical returns. Rates today at 2.4% are half the current GDP 4.7% we are seeing. There will be a significant normalization from the abnormally low rates we see today. When is the question!!

I do not think we can predict this with much precision. We have both a fear of equity volatility and additional capital flows to the US which are acting on US Treasuries as many seek safe havens. Even Italian and German debt trade at or even more expensively than the US due to this impact. All we can say is that this will normalize over time and result in one huge equity blow off to the upside at some point down the road as investors gain confidence, move from today’s position of pessimism to one of over confidence and in the process sell debt to chase equity returns.

This is where understanding markets is most valuable. You learn what drives price activity, learn what you cannot know with precision and then become aware of the larger historical patterns and what is possible. This makes me very positive for equity returns [SPDR S&P 500 ETF Trust (NYSEARCA:SPY)] over the longer term.  Even though I cannot predict how high or when, I can see historical  human behavior.