10-year Spike: 70 Bps, 14 days

The rapidity of the spike in long-term Treasury rates  is starting to raise some eyebrows. The yield on the 10-year bond has increased 70 bps in just 14 days.

We have identified thirteen similar moves, where rates initially spiked 70 bps in 14 days and looked at how rates and the S&P 500 subsequently behaved 10/30/90 days after the move.

In six of the thirteen cases, the S&P 500 was down by 3 percent or more 30 days after the rate spike.  In three of these cases, the 10-year continued to move higher by at least 20 bps over the next 30 days.   The most infamous was the 300 bps spike in 1987, where the 10-year moved from 7.01 percent in mid-January to 10.23 percent just prior to the October stock market crash.

In some cases, the rate spike signaled improved economic and financial conditions such as the case  in the March 1999, shortly after the Russian Debt Default and collapse of Long Term Capital.  This was followed by a massive stock move, which ultimately proved to be the final leg and blow-off top of the dot.com bubble.

The chart below does show interest rates and the stock market can move higher together over relatively long periods, which we believe will be the case if policymakers begin to address the structural imbalances in the economy.    Though rates are currently moving off historical lows, and such a big move is not surprising, there is, however, added uncertainty on the message of move given the current environment of large deficits and heightened sovereign risk.

We strongly urge the politicos not to be complacent and dismiss the rate move as confidence the economy is improving, even if it does partially explain the increase.  Washington should rather take it as a “Sputnik moment” and further motivation to address and develop long-term solutions to the country’s budget deficit and debt overhang.   Failing to do so will make what happened in 1987 look like a walk in Central Park.

This entry was posted in Black Swan Watch, Bonds, Budget Deficit, Charts, Equities, Fiscal Policy, Politics, Sovereign Debt and tagged , , , . Bookmark the permalink.

4 Responses to 10-year Spike: 70 Bps, 14 days

  1. FX says:

    I had been working prevouisly off an H\S pattern in 99 for this years April high, the one in 99 was apprx 10 mths before your final blow off…..so was the one before the April high….now that there has been another one…..maybe rates is the next shoe to drop…..but with so many ad hoc liquidity backstops to keep this market afloat while the macro catches up, I don’t think I”ll step in and catch a falling knife.

    • macromon says:

      I noticed that.. Looks like a massive H&S being carved out in S&P.. Why is it so critical it breaks the right shoulder resistance right here.. Also interesting to not the fractal patterns in the S&P, ie, mini H&S patterns on the left shoulder and head. Thanks, FX!

  2. Sean says:

    I think it’s interesting that as this move has happened, gold and the dollar have all been pretty flat.

    • macromon says:

      Sean, Good points. A increase in real rates should be dollar positive and gold negative. There are many forces at work and difficult to isolate each one. Unfortunatley, real word economics/finance is not physics..

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