Calling The 10-Year Treasury Yield
It is difficult to call the 10-year Treasury yield over the next 6 months or so. In the immediate term I would expect yields to move a bit lower as I expect a rotation into Treasuries as a result of the Iran / Israel war. If the war escalates (I expect it to escalate under the current Administration), there will be a significant “risk-off” trade.
We highlighted the risk of an Iran / Israel war months ago (HERE).
Equities are anything but cheap. 50x EBITDA or a 50x PE for a Technology company is not cheap. These outrageous valuations are 100% the result of the fiscal and monetary policies of 2020-2022, particularly the stimulus checks of Trump and Biden and Powell’s abysmal QE program. As a result, most every investor expects Fiscal and/or Monetary policy to ALWAYS bail out the market. This perception has created a valuation mania.
What will happen if this bailout expectation does not become reality? What will happen if fiscal deficit spending slows and QE does not return? The market reaction will be violent.
The United States has an enormous moral hazard problem that began in 2009 and got far worse with the COVID response of 2020 and 2021. Today, CEOs, institutional investors and many people all expect to be bailed out by the State. This is the fundamental problem with Government welfare / bail out programs. These programs do not help drive economic productivity, they drive dependency and destroy the value of the Dollar in the process (newsflash, CPI will not see 2% anytime soon). Government is not your friend, nor is it the friend of the U.S. economy.
My view is that at some point dovish Fiscal and Monetary policy will grind to a halt. That will be when Treasury investors demand more than a 3-4% yield on the 10-year. For example, if the 10-year was at 5-7%, the United States’ print first, ask questions later fiscal policy would be out the window as that 5-7% yield would force all future Treasury issuance to T-Bills and the U.S. can’t afford to roll over all of its paper every 30, 60, 90 days.
Treasury has a 10-year auction coming up mid-month. Let us see how that plays out.