Yields are Rising. Danger or Opportunity!

in #finance6 years ago

The U.S. government is considered the lowest-risk borrower in the world.

The bonds are considered to be "risk free." After all the Government has the ability to print currency to cover any outstanding bonds whenever it wishes. (Perhaps they should be clarified as known risk free from default. Still plenty of risk from purchasing power changes.)

The global benchmark has typically been the 10 year Treasury yield especially for longer term debt or projects.

The simple fact is that interest rates help investors determine value.

For example, you would only accept the risk of lending to another party for 10 years if you were given a higher interest rate than the US Government 10 Year Treasury bond. Or think of buying a company. Running a company has vastly more risk than the US Government therefore the expected return to make that investment would have to be significantly higher.

For the longest time the 10-year Treasury yield has been in a downtrend. This trend line has been a level that interest rates would not rise above.

It has now broken above its downtrend line having spiked to above 3%.

The 10 year yield chart is clearly showing a double bottom pattern that typically launches prices higher on the break above the recent highs.

In the chart below, you see a long term double bottom begun in 2012.

The double bottom pattern is confirmed if yields break out above their 2013 high of 3.03%. The target of 4.7% is based of the spread between the double bottom lows and highs. (3.03 - 1.36 = 1.67. Take 1.67 spread plus 3.03 = 4.7 yield target)

10-Year.png

Few are prepared for rates to rise to 4.7%.

Bond prices have an inverse relationship to yield so as bond yields rise the value of bonds falls causing investors to show unrealized capital losses. Do not tie your money up in long term bond funds (if you must have bond funds stick to those with less than 5 years to maturity).

How do stocks and precious metals do in a rising interest rate environment?

In the 1960s and 1970s, Gold and interest rates rose for long periods of time. It depends on investors confidence in fiat money and inflation rates.

Interest rates are currently extremely low so stocks can still be an attractive investment comparatively. However, at some point higher interest rates will make stocks in general an unattractive asset class. Since the stock market is suppose to be forward looking we are currently seeing stress every time rates have approached the 3% mark.

Opportunities to profit will exist no matter the yield. By watching interest rates we can be prepared for a changing investment environment and protect our portfolios accordingly.

Coin Marketplace

STEEM 0.35
TRX 0.12
JST 0.040
BTC 70541.68
ETH 3582.21
USDT 1.00
SBD 4.74