Taking a Look at the 10-Year Treasury Rate
What is it?
It seems like every day we are hearing stories about high inflation and the possibility that the Federal Reserve may start to act aggressively to help control higher prices.
Some of the tools that Jerome Powell has in his toolbox is controlling the rate at which banks lend to each other. He recently shared that the Federal Reserve may raise that rate 3 times in 2022.*
The 10-Year Treasury Rate is market-based meaning that it fluctuates daily based on the bond market. It is also much more related to how you may be affected by interest rate changes as it affects mortgage rates for example.
Why does it matter?
Here’s a long-term chart of the 10-year Treasury Rate.
Source: Macrotrends.net**
As you may remember or have heard about, we have been in a constant interest rate slide since the early 1980s. At that time, Paul Volcker, the Fed Chairman at the time, was very aggressive in fighting against inflation.*** In 1979, he raised the Fed Funds Rate from 11.9% to over 20%. Here’s the historical chart:
Source: Macrotrends.net****
As you can see, the two charts are somewhat different. My interpretation is that the market-based chart seemed to lead into higher rates before the Feds started their hiking.
When we consider investment management, it is not always about the stock market. We also keep an eye on the currency and bond market to attempt to understand how these markets are behaving against the current economic environment. We believe that we can gain a different perspective by having a broader look at the markets as a whole.
Here’s the 1-year chart of the 10-year Treasury
Source: stockcharts.com*****
Until very recently, the 10-Year Treasury Rate has been very stable over the last year even when conversations about inflation started over a year ago. This recent spike may become more pronounced, but in our opinion, we believe that the bond market may be expecting inflation to peak sooner than expected by the Feds.
ECB’s Lagarde: Inflation drivers will ease gradually in 2022
What is it?
“Inflation in the euro zone will decrease gradually over the year as its main drivers, such as surging energy prices and supply bottlenecks, are expected to ease, European Central Bank (ECB) head Christine Lagarde told France Inter radio.”***** *
“Asked on her policy to counter price pressures, Lagarde reiterated that the ECB did not need to act as boldly as the U.S. Federal Reserve because of a different economic situation.”***** *
Why does it matter?
By investing globally, we hope to mitigate some of the risks of investing in any one country or region. The above quotes shed light on the difference in economic conditions between the U.S. and Europe. The Federal Reserve in the U.S. seems to be willing to tighten economic conditions more than the European Central Bank (ECB).
Other articles I found interesting this week:
World Economic Forum president: ‘Countries need to collaborate,’ prepare for the next crisis today
Tensions between Russia and Ukraine aren’t fully priced into commodities
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Our last portfolio reallocation: 10/11/2021.
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The weekly market update provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach.
Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
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Sources:
*Irina Ivanova. “Federal Reserve: Expect 3 interest-rate hikes in 2022”. 12/15/2022. CBS News. https://www.cbsnews.com/news/fed-interest-rate-annoucement-what-to-expect-2021-12-15/
**Macrotrends: “10 Year Treasury Rate – 54 Year Historical Chart” https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
*** Wikipedia: “Paul Volcker” https://en.wikipedia.org/wiki/Paul_Volcker#:~:text=The%20Federal%20Reserve%20board%20led,rate%20rose%20to%20over%2010%25.
****Macrotrends: “Federal Funds Rate – 62 Year Historical Chart” https://www.macrotrends.net/2015/fed-funds-rate-historical-chart
*****Stockcharts.com
***** *Reuters. “ECB’s Lagarde: Inflation drivers will ease gradually in 2022”. 1/20/2022. Reuters. https://www.reuters.com/world/europe/ecbs-lagarde-inflation-drivers-will-ease-gradually-2022-2022-01-20/
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