Part of analysing any market is the cross influence of other global markets and what they might be telling us. At BtInvest we are becoming increasingly concerned with the behaviour of US Interest Rates.
We are, according to all reports, in the middle of a growing economy in the US. The FED are tapering their Bond purchases; OK, not reversing these purchases but reducing the rate at which they purchase them – Its a start.
Given this scenario the 10yr Bond Yield should be showing an impact, we would expect the rate to be rising. This was true up until Q4 2013; rates had been steadily rising from a low of 1.4% until in September we hit 3%. Since then we have been in a broad range between 2.5% and 3%, last retesting the 3% level in December 2013 before declining to the current tighter range of 2.6%-2.8%.
While it is never good practice to pre-empt a breakout from a range, we are increasingly concerned that the yield will break out of the tighter range to the downside and test the 2.5% level. If we then complete the breakout from the 2.5%-3% pivot range to the downside this will have serious implications for the Global Marketplace.
The major risk is that this move is foreshadowing a dramatic slowdown in the global economy; we don’t see how a sub 2.5% 10 year yield can be justified in a growing economic environment. If this slowdown takes place we are likely to see a dramatic shift out of risk assets such as equities and a flow into what are perceived as safe havens (US Treasuries, Gold, Swiss Franc, the usual suspects).
At the moment Global stock markets are clearly not anticipating any slowdown of this kind. This could either mean that we are being overly cautious, as I said it is always dangerous to pre-empt a breakout in any particular direction.
Alternatively it is a well known maxim that where the bond market leads the stock market follows (eventually) so at the moment we at BtInvest are keeping a watching brief on both interest and credit rates for any sign that trouble may be brewing.
BtInvest 