We all have a morning routine. Every morning I roll out of bed and before heading to the shower try to gauge what kind of market the day has in store. I do this by checking the S&P futures market for a look at the stock market and by looking at the yield on the 10-year U.S. Treasury bond for a look at the bond market (I used to do this on the TV, then the computer and now it’s the smart phone). These two data indicators have been a part of my day for most of my adult life.
I have to admit, the stock market gets most of the attention, but the 10-year U.S. Treasury rate is just as vital and sometimes says more about the state of the world than its stock market counterpart. That being said, watching the 10 year is boring, and has been especially boring over the past two years as rates have persisted below 3 percent, and often well below 2 percent.
The last six weeks, however, have been significant for this vital indicator, as this rate has moved from the incredibly low 1.6 percent level to closing Thursday at more than 2.2 percent.
If this is making you yawn, I understand, so I’ll put it in a little perspective. From a market movement point of view, this type of rate move indicates about a 5 percent decline in bond prices.
If this type of move had happened in the stock market, the Dow would have been down 750 points during May, and we would all be paying attention. So this type of movement in bonds is a big deal, and if you do the math this one-month move pretty much wipes out three years of the anticipated interest payments generated by these bonds.
While I really can’t get too worked up about a 10-year interest rate of 2.2 percent, I am very interested in the trend of rising rates. In some part I consider the 10-year as a sort of fear barometer, not unlike gold in some ways. Both investments are used as a catch-all store of value during times of heightened financial stress.
Therefore when 10-year rates rise, it indicates investors taking money out of something the world considers safe. Because this trend is following a considerable recent sell-off in gold, we may be able to form a hypothesis that perhaps the global “fear trade” is losing its appeal. Stay tuned.
Opinions are solely the writer's. F. Marc Ruiz is a local investment strategist and co-host of "Your Mind on Money" at noon Mondays on WLPR-FM 89.1 The Lakeshore. Reach him at firstname.lastname@example.org.