Rates, Rates and More Rates

by Geoff Garbacz | 02/28/2021 9:13 AM
Rates, Rates and More Rates

This morning on the way to the office to do some writing before the end of a three day swim meet, a song got me thinking about rates. That song? Country Boy Can Survive by Hank Williams Jr. There is a stanza that goes, "The interest is up and the stock market is down, And you only muggged if you go downtown."

That pretty much summarized what has been happening to the S&P 500 and Russell 2000 since the middle of February. The Russell 2000 is lower by -4.26% and the S&P 500 by -3.24%. Meanwhile, the yield on the 10 year has risen from 0.92% on December 31st to a close on Friday of 1.41%. Notice the chart below we have highlighted the return on the 20Treasury Bond ETF (TLT) and the S&P 500. In the last five years, you will notice that three of the four times the TLT had a major drop, the S&P 500 suffered as well.

[Image 2]

During Thursday's nasty stock market action, the 10 year yield hit 1.60% after spending most of the day at 1.50%. It came back to 1.50% pretty quickly which means only one thing. The Federal Reserve New York trading desk stepped in to support bonds. Funny how the mainstream financial media (MFM) failed to report on this very important fact. As long as we stay below 1.50% which is now the new resistance level, the recent volatility should start to subside.

A great place to find the yield each day is on our morning note as we list it there. Also, if you have access to quotes then follow the 20Treasury Bond ETF (TLT) which hit a low on Thursday of $136.61 before rocketing back to $143.12. There is no 10 Year ETF so we use the 20 year ETF as a proxy. A move to 2.00% on the 10 Year would hurt stocks that have lots of debt and less than pristine debt sheets or even average balance sheets. The best example would be Tesla (TSLA).

So this past week the stock market got a warning and it needs to be respected. Kind of like how my 11 year old got a Disqualification (DQ) in his last swim race yesterday because he takes too long to get into the start postion and then he moves around which you cannot do and will result in a DQ. Respect how bond yields can DQ stocks you own and you will be a better investor.

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