Given the proximity of the Federal Funds rate to the short end of the government yield curve, the Fed generally has more ability to manipulate (strongly influence) yields for Treasury Bills and short term notes than instruments such as the UST 10 year note and 30 year bond. The two year UST note generally receives much less media attention than longer duration government debt. Even most interest rate insiders these days concentrate much more on the long end of the curve than on the two year. However, financial heralds also should focus on short term American interest rate yield levels and trends, because in the current marketplace landscape, signs of bottoming and rising rates in this important segment of the UST yield curve confirm the higher yield trend in the 10 year UST and other long-dated securities.
After the UST two year reached a major low near the ground at .14pc on 9/20/11, it reaffirmed this depth with subsequent lows at .19pc on 7/23/12 and 5/3/13. The UST two year note thereby established a major bottom alongside that in the 10 year note. Admittedly the two year yield has not spiraled upward as dramatically as the 10 year’s, for the Fed conductor has not relaxed its tight grip on the Fed Funds rate baton. This relative quiet in and the low absolute level in the two year tend to create faith in and complacency regarding the Fed’s powers and the effectiveness of its methods. Very low short term government rates and promises to continue them arguably encouraged some complacency, not merely happy enthusiasm, in equity halls such as the S+P 500 as well. The S+P 500 was all jazzed up through much of calendar 2013, attaining its recent high around 1710 on 8/2/13. Yet this intertwined yield low and rising rate pattern at both ends of the government yield curve warns of weakness in the Fed’s near term ability or willingness (or both) to keep repressing short term yields to very low levels.
The bear move of higher US interest rates probably will continue, even if that venture is jagged and perhaps occasionally interrupted by forceful Fed action (or wordplay) or flight to quality fears. Marketplace history is not marketplace destiny. But in the current context, historical review suggests that a sustained substantial climb in US government interest rates such as the one currently underway probably will encourage a decline in the S+P 500. After all, sustained yield declines in US government rates helped to rally American stocks, so might sustained yield rallies help to reverse some of that equity bull charge?
Increasing government interest rates do not always indicate economic strength or point to (confirm) rallies in stock marketplaces. Recall the rather recent big-time crisis on the so-called “European periphery” that captured the limelight, as well as the experiences of many emerging marketplaces.
Anyway, increasing United States government interest rates are not always (necessarily) a sign of American economic recovery and strength, or of a bull move in stock benchmarks such as the S+P 500. The extent to and reasons why which UST rate levels and trends coincide (converge) with or lead (lag) those of those in the S+P 500 are matters of opinion. In any event, review the following table, which covers the past 25 years or so. Putting several substantial moves in the UST two year note in a spotlight alongside those in the S+P 500 indicate that sustained significant ascents in UST rates often eventually link to notable peaks in the US stock marketplace. The tops in yields are “roughly around the same time” as bull highs in US equities. UST 10 year moves are consistent with this perspective as well.
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