To The Moon

We have seen 10-years Treasury yields reaching more 16- and 17-year highs on 18 Oct (Wednesday) as investors focused on the U.S. economy's resiliency.

U.S. 10-Year Treasury Notes Yield rose to 4.99% on 19 Oct (Thursday) from 4.902% (Wednesday). This created a new highest close since July 25, 2007. Briefly hitting above 5% earlier.

What has helped Treasury Yield to rose much

There have been economic data released this week which has suggest that U.S. economic strength is in focus.

On Tuesday (17 Oct) we saw a strong U.S. September retail sales report which show that U.S. economy remain resilient. We also saw Q3 GDP estimate being adjusted from 4.5% to 4.9% by Morgan Stanley.

On Wednesday (18 Oct), housing data show that it start to rebound 7% in September to an annual pace of 1.36 million units. Fed Governor Waller mentioned that policy makers need to "wait, watch and see" how the economy evolves before making any interest-rate moves. According to the Fed's Beige Book report, U.S. economy exhibited stable to slightly weaker growth during the early fall.

On Thursday (19 Oct), in Fed Chair Powell speech to the Economic Club of New York, the U.S. economy's strength and continued tight labor markets could require still tougher borrowing conditions to control inflation.

But rise in yields was helping to further tighten financial conditions and "at the margin" might lessen the need for additional Fed rate increases, though rising market interest rates could make action by the central bank itself less necessary.

In summary, we can see that U.S. economy showing signs of strength even with tight labor markets still have investors dipping into bonds, bonds look more attractive because investors can lock in returns of about 5% on 10 or 30-year U.S. government bonds. By comparison, many investors believe the returns on shorter-dated debt will likely decline over the same period.

Before we go and look at the probability of how the interest rate move will be like in 01 November. I would like to take a look at how S&P 500 have fared this week when we see 10-year treasury yield move higher.

S&P 500 vs U.S. 10-Year Yield

We seem to see a huge surge in the treasury yield while S&P 500 though we do see some increase at times, but it is not following in tandem with the trend.

Let us examine in details on how S&P 500 would be moving in following weeks if bonds yield continue to rise.

Why S&P 500 Is Declining When Bonds Yield Is Up

From the chart we can see that treasury yields were higher 16 Oct (Monday), with investors assessing the U.S. economic outlook as uncertainty about the path ahead for monetary policy, as well as geopolitical concerns, continued.

The yield on the 10-year Treasury was nearly 8 basis points higher at 4.71%. Yields and prices have an inverted relationship and one basis point equals 0.01%.

If we noticed how the yield have with S&P 500, we can see that when yield start to increase from Monday to Tuesday, S&P 500 seem to move sideway flat. But as concerns about the Israel-Hamas war and its implications, including for financial markets and the energy sector, continued as Israel is expected to begin a ground offensive into Gaza this week.

We can see that yield start to move higher as investors move towards bonds particularly long-term U.S. treasury yields as they still have room to rise but in the near term, this could also move in both directions as inflation eases and Fed might be near the end of the interest rates peak.

This bring us to look at whether there will be pause in interest rate in November, if that happen, we might see yield coming in.

$S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$

01 November Interest Rate Hike Pause Probability

Market has already starting to price in a 92.2%probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on 01 Nov, according to the CME FedWatch Tool.

Inflation concerns were reinforced by oil prices, which settled at a more than two-week high amid rising tensions in the Middle East.

We saw oil surged on 18 Oct (Wednesday) as Iran reportedly called for an embargo on selling oil to Israel, Bank of Japan announced another round of unscheduled bond purchases after the country's 10-year bond yield hit a fresh decade-high of 0.815%, according to Bloomberg.

What this would mean we could be seeing 10-year yield crossing 5% and stay there for a while. I would take a cautious approach to the stocks, especially in S&P 500.

Summary

Based on what investors are currently moving for their portfolios, we can see traders closely watching the 10-year Treasury yield to see if it finally hits 5% which it did briefly on 20 Oct 2023 5am (SGT), a first since 2007.

What is important for investors is to stay focused to look out for some solid bargains for the long-term.

If you are an investor who has fixed-income portfolios in cash and near-dated treasury, you may want to look out for opportunity for longer duration bonds.

This will help your portfolio as duration is a measure of a bond’s price sensitivity to changes in interest rates, and longer-dated bonds have greater duration.

Appreciate if you could share your thoughts in the comment section whether you think it is a good time to invest in long term treasury bonds, like 10-year, 20-year and 30-year.

@TigerStars @Daily_Discussion @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.