10 Yr Treasury Rates vs. S&P 500 The rally in long dated US treasuries over the past 35 years could easily be called the greatest bull market we've seen in modern times. 10 yr rates have been trending down in a near perfect channel for almost 30 years. Calling for the end of this rally has become a popular pastime. Due to the nature being zero bound on rates, the upper trend line will with 100% certain fail at some point. However, will the greatest bull market we've seen end without at least one more touch of the long term trend?
Some recent forecasts were just released by Barron's magazine for "top wall street strategists." Link -> online.barrons.com In summary, out of 10 strategist all 10 expect higher equity prices (avg prediction 2210, ~10% from current levels). For 10 yr rates, 10 out of 10 expect higher rates for 2015 (avg predicition 3.05, almost a full percent above the current 2.1). The primary sentiment seems to be that rates are so low that they cannot possibly go lower. However, 10 yr rates of other developed countries are showing that is just not the case. Canada - 1.75%, Japan - .39%, Germany - .62%, France - .89%, Netherlands - .76%, Switzerland - .23%, Hong Kong - 1.7%.
Its unclear currently to me what the primary driver will be for rates going to the 3% level referenced above. Inflation has been well in check by recent reports. Commodities prices have been trending significantly lower in aggregate. And the US dollar is looking as though it is currently breaking out of a 30 year downtrend, an event that is more likely to import deflation from abroad than to cause inflation.
From a technical standpoint, as mentioned above the 10 yr rates have been trending lower in a well defined channel for over 30 years. The current question I think is whether we will get one more touch of that lower trend line before any meaningful reverse higher. Marked on the chart is a measure of the time elapsed between troughs in the 10 yr rates that occurred on this trend line. The average from 1993 has been right around 245 bars, with the shortest period being 187. If we use this as a guideline then we could expect the next trough in the 10 yr rate to occur as early as the end of next year to as late as April 2017. Depending on the timing, those periods would line up with a rate of .75% and .50% respectively. Will rates get that low? I'm not sure and there's not much value in trying to answer that right now. A move like this would clearly surprise the most people and given the right circumstances I think it is at least a possibility. More importantly though is that the current trend has been for lower rates and the current sentiment on bonds is overwhelmingly bearish.
Also shown as a backdrop to the rates on the chart above is the S&P 500. It worth noting that each time the 10 yr rate has touched the bottom trend line, it has also marked an excellent entry point into stocks. But the opposite has also been true. As the 10 yr rate peaks and heads towards the bottom trend line, it has not been a great time to be long stocks.
So will it be higher stock prices and higher rates for 2015 as 10 out of 10 top strategist suggest? Or might we be in store for something different. A market that chops sideways to down while rates grind lower towards that bottom trend line. One piece of evidence that has me thinking the latter is the stocks to bond ratio that I recently looked at. We could be nearing a breakout in that ratio and would support a move like this (linked below)
