From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Back in January, the big story was the yield on the 10-year US Treasury note printing new multi-year highs.
At the time, other benchmark yields worldwide were also resolving higher, completing large bases.
This was confirming evidence that added to our conviction US yields were headed higher and that we were in the early stages of a rising rate environment.
The confirmation from global yields proved valuable information.
Almost six months later, the US benchmark is just below 3.00%. As it pauses below a critical level, we again turn to overseas rates to get a read on the potential near-term direction of the 10-year yield.
And just like earlier in the year, they’re pointing higher.
Let’s take a look.
The yields on 10-year government bonds from France, Germany, Spain, Portugal, and the UK have taken out their respective pivot highs from last month, something the US 10-year has yet to do.
Now that these benchmark rates are breaking to fresh highs, we think it’s just a matter of time before the US 10-year follows suit.
Global yields led US rates higher in early February, and they look like they’re doing the same today.
But what does this mean for the broader market?
Most importantly, it signals that we’re in a rising-rate environment, and that’s a clear departure from the past decade.
We want to sell bonds, eyeing a break below the 2018 lows in US Treasuries. On the flip side, we want to lean into commodities and focus on the cyclical value areas of the stock market for buying opportunities.
Basically, we want to buy the things that do well when rates rise and sell the things that don’t. That’s been the playbook, and it remains the playbook over any significant timeframe.
The world’s credit markets agree that rates are on the rise.
So all we have to do is listen and act accordingly.
Countdown to FOMC
Following the Federal Reserve’s recent rate hike, the market is pricing in a 50-basis-point hike at the June meeting.
Here are the target rate probabilities based on fed funds futures:
*Click table to enlarge view
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