From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The middle of the curve is catching higher as the US 10-year Treasury yield pushes toward its next milestone at 2.00%.
Now that we’re starting to see some follow-through to the upside, it raises the question…
Are these new highs in the 10-year sustainable?
With inflation expectations just off their highs, short-term rates surging in the US, and yields ripping higher across the globe, we think the answer is a resounding yes!
A few weeks ago, we discussed how global yields -- particularly those in developed Europe -- were confirming the new highs for US yields.
Since then, we've only seen this trend accelerate. With central banks turning increasingly hawkish, rates continue to break out to new highs around the world.
Today, we're going to dive further into this theme by taking a look at a handful of benchmark rates outside the US.
Let’s dive in!
First up is the German 10-year:
The running joke is that the German benchmark rate has broken back above resistance at zero. Not only are we back in positive territory, but we’ve seen some very bullish momentum the past few weeks.
Such an explosive upside resolution from this multi-year base suggests that these new highs are here to stay.
And those are two major themes that stand out as we highlight European yields:
- big base breakouts,
- followed by strong moves higher.
Another great example is the UK 10-year yield:
The Bank of England came out swinging last week with plans to hike rates, tighten monetary policy, and reduce its balance sheet. It doesn’t get more hawkish than that.
In response, the UK 10-year yield jumped to its highest level since 2018.
Another European country where rates are on the rise is France:
The French 10-year yield just broke out of a multi-year base and reclaimed both its COVID highs and a key level at the 2017 and 2018 lows.
It's risen almost 50 basis points year to date!
Even the PIGS are getting in on this action lately. Here's the Portuguese 10-year yield:
Unlike its peers above, the Portuguese 10-year is still below its COVID highs. With that said, it’s made an impressive move, climbing 60 basis points since the beginning of January and reclaiming its first-half 2021 highs.
It’s also important to note that this trend is not just playing out in developed Europe. Rising rates is a global theme right now.
To illustrate this, let’s have a look at the Japanese benchmark yield:
Like Germany, Japan is now back in the green after a half-decade of offering negative yields. It just resolved from a massive base to new five-year highs and is up 20 basis points on the year.
To recap, 10-year yields are breaking to fresh highs around the world, and they’re doing so with conviction -- big breakouts followed by strong moves higher.
This is some of the best confirming evidence we could get for the new highs from yields in the US.
The bottom line is that various economies and countries all over the world are in agreement that we are now in a rising-rate environment.
We want to continue to position ourselves accordingly and look for opportunities in areas of the market that benefit most when rates are on the rise.
Things like commodities, cyclical stocks, financials, and international equities are all at the top of that list.
Countdown to FOMC
Based on the most recent Federal Open Market Committee meeting, the market is pricing in a rate hike in March 2022. Here are the target rate probabilities based on fed funds futures:
This data is from the CME FedWatch Tool as of February 8, 2022.
Thanks for reading. As always, let us know what you think.
And be sure to download this week’s Bond Report!
