Lets Put Treasury Yields in Perspective
- Posted by JC Parets
- on July 23rd, 2011
Technical Analysis is not just about looking for chart patterns on $10 stocks. When you venture into other asset classes you open yourself up to a whole new world of Intermarket Analysis. When money is moving into something, it has to come out of somewhere else. Understanding the behavior of the asset classes and how they are correlated with one another is fascinating to me.
Last week we put up a post: Putting Gold prices in Perspective. We looked at Gold relative to US Equities and also adjusted the yellow metal for inflation to get a Real idea as to where prices are currently when compared to historical data. Today I would like to take a closer look at US Treasuries and see whats been going on there. Doug Short, as usual, puts up some incredible charts that really tell the story:
The first chart shows the 10-Year Constant Maturity yield since 1962 along with the Federal Funds Rate (FFR) and inflation. The range has been astonishing. The stagflation that set in after the 1973 Oil Embargo was finally ended after Paul Volcker raised the FFR to 20.06%.
The Next two charts show the impact that the 10-Year yields and Federal Funds Rate has had on the S&P500. The first one adds the nominal chart of the S&P, which significantly distorts the Real value of both Stocks and Yields. This is why brilliantly, dshort created the 2nd chart, which not only shows the S&P500 adjusted for inflation, but also subtracts the annualized Inflation rate from both Treasury yields and the Federal Funds rate.
Using the seconds chart, we can better understand the severity of the decline in equities from the mid-1960s to the bottom in 1982. And we can also see why high yields can be deceptive in periods of double-digit inflation. dshort points to the FFR red line as the most interesting series in the charts. We can see how the Fed has used rate to control inflation, accelerate growth and, when needed, apply the brakes. Unfortunately, the FFR has been virtually zero since December 2008, so it is no longer available as a tool to stimulate the economy.
When looking at historical data, it is important to me to compare apples to apples. Doug Short does a great job of this as usual. His site is a must read so go check it out at www.dshort.com
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) and is a member of the Market Technicians Association. More
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