10 Year Hits Near Critical Level

It’s more of the same today, with mortgage bonds continuing to drop in value and the stock markets falling as well. The 10 Year Treasury Note yield hit 3.03%, which is just shy of the 3.04% target. This is an important line in the sand, as it represents the top of a trend line that has been in place for 30 years. When you consider the significance of a possible breakout above a downward trend that has been in place for this long, it would create a completely different environment than we have been in for 3 decades. Rather than the long term trend being falling rates, we would see rates head in an unknown (likely higher) direction. This will certainly impact the financial markets as well as housing. As always, there would be winners and losers in this change.

Two year yields have now reached highs last seen in 2008. This is pressuring large consumer purchase finance costs higher.  This will also impact corporate borrowing costs, which will absorb some of the savings from the recent corporate tax cut. Since financial issues tend to balance out, there are downsides to tax cuts. This reflects one example of such impact.

Tomorrow is a big day for the bond market, as we will get an update on GDP. The market is expecting an annualized rate of 2.0%. This could easily be hit. If so, markets could sell off even further. However, with the 10 Year near 3.04%, we could see bonds stabilize near current levels.

Although longer term I see things getting slightly better, it doesn’t help in the current environment. We will maintain our locking bias.