What's Next for Bond Yield?

February 14, 2018 8:28AM CST

As we've all read in various Wall Street news periodicals and listened in on our favorite financial television pundits, it's no secret that bond yields have risen to levels unseen for nearly 3-4yrs.  The 30yr yield crossed the 3.00% barrier two weeks ago (presently 3.11%), while the benchmark 10yr yield is fast approaching the all important psychological level of 3.00% (present 2.85%).  What's been the driving factor is also no secret, US domestic growth and inflation accelerating in the back half of last year.  US growth accelerated on a year over year basis for four, soon to be five consecutive quarters. The Atlanta Fed GDP tracker has domestic growth for Q1 2018 presently tracking at 4.0% (which is always subject to change between now and the end of Q1), however, should easily beat its 2017 quarterly comparison of 1.4%. 

But what's next?  As far as we can see, growth should continue its upward march higher, but the comps begin to get tougher from here on out.  We also believe US corporate earnings and profits could begin to decelerate in Q1 (reported in early Q2) on year over year basis.  As we all know, the market is a forward-looking mechanism, and based on some of our near-term inflation gauges, we're of the opinion that bond yields may begin to cool off from their recent march higher. Sure, looking at bond yields on a long enough timeline, we can certainly see ourselves as bullish. However, for the next two to three months we're beginning to like the idea of a mean reversion trade in the interest rate markets allowing both the 30yr bonds and 10yr notes to come up for some air.  There's a few different options to construct this trade, utilizing both the short end and the long end of the curve, feel free to reach out for more details on strategy, or if you'd like to tap into some of our proprietary emailed trade recommendations for a free 30-60 day trial. 

30-Yr Bond Monthly Chart

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