From the Desk of Ian Culley
Markets churn sideways, plagued with indecision. But one thing is certain…
The global rising rate environment remains intact.
Developed European benchmark interest rates are posting fresh highs. Those potential failed breakouts back in early January have quickly turned into nothing more than false or premature moves.
And while US yields continue to climb, their recent rise pales compared to their European counterparts.
What does that imply for domestic rates in the coming weeks and months?
For the past year and a half, we have turned to developed European yields for insight into the direction of domestic interest rates.
The analysis proved insightful as the rising rate environment has been global in scope. Europe has given a nice heads-up regarding the direction of yields stateside. And the market continues to support this approach.
Check out the German 10-year yield:
This European heavyweight hits its highest level since the summer of 2011.
But it’s not just the top dog leading the way higher…
The Spanish benchmark looks very similar:
Last year’s uptrend holds, evidenced by the trendline and fresh multi-year highs.
Interestingly, the Spanish equivalent is revisiting its early 2014 levels that coincide with the ‘08, ‘09, and ‘10 lows – a friendly reminder that these are big levels!
The French 10-year yield looks almost identical to the previous charts:
The main difference arises when we compare former highs. Unlike the Spanish benchmark, the French 10-year has surpassed its former 2014 highs, printing its highest level in over a decade.
Regardless, we’re more interested in the near-term levels as they inform our tactical outlook.
Portugal is posting new multi-year highs, and even northern European yields are ripping.
Here’s the Swedish 10-year yield:
But it’s not just Sweden. Denmark and Finland are also reaching levels not seen in over a decade.
So, will the US follow?
Yes, the US 10-year yield back to 4.50% seems the higher probability outcome as long as the rising rate environment remains intact.
We don't have a crystal ball. But based on the charts above, we have no reason to doubt this continues to be the case.
So what does the market look like if the US 10-year yield is trending above 4%?
Bonds are most likely catching lower. Growths stocks are experiencing renewed selling pressure. And the growth-heavy US averages continue to grind sideways, underperforming international indexes.
Higher rates will only exacerbate these trends – trends that remain in place from last year.
Whether US yields continue to rise will have broad market impacts that no investor can afford to ignore.
Stay tuned.
Countdown to FOMC
Following the recent 25 bps hike, the market is pricing in another single-hike at the March meeting.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of March 2, 2023.
Thanks for reading. As always, be sure to download this week’s Bond Report!
