Right from the start of 2014, rates started declining. And declining rather steadily, recouping the entire 2012-2013 move and sliding back to 1.5%. (There was some trepidation in the early months of 2015, but this move higher was smaller in size and length.)
As we entered the latter half of 2016, rates once again began moving higher. Then came the Trump-sized catalyst (or wrench depending on who you ask) which caused rates to scream higher. Following the election, again there was much discussion on higher rates and the end of the bond bull market.
And then…..
Of course it has been a very short measurement period, but since mid-December rates have once again moved rather steadily lower, seeing the 10-year move from 2.60% back down to 2.33% at the time this was written. Now while a 27bp move hardly represents a shift in regime, it does at a minimum have to cause some concern whether or not the higher rate trend we have seen in the latter half of 2016 is on schedule to continue. As just mentioned, there is a Trump-sized catalyst waiting to happen, and with inauguration day looming, uncertainty is high.
Additionally, the pattern of which rates are moving higher is similar to that of the 2012-2013 move (steadier climb, then a spike, then a continued move higher). If rates were to happen to follow that same trend, this recent dip could be a temporary correction and we may see another short-lived move higher. But again, if rates were to follow the same pattern, the V-shape near the end (of which we could be in the first leg of) was followed by a sustained move lower.
So while we are in a bit of a wait-and-see pattern now it would appear, a longer-term view of interest rates can provide an additional viewpoint. Here is a chart of 10-year treasury rates over the past 30 years through the end of December 2016 (where rates were at 2.45%)
Right now rates are still decently within the long-term trend channel. So while there is room to move higher, it would seem that a break of the top side of this channel would provide a stronger case that we could truly be seeing the end of the bond bull market.
Right now, the top of that channel sits right about 2.80%, which sits right in the middle of where two well-known pundits have set their line-in-the-sand of where rates need to exceed to be in a new, higher environment (2.60% and 3.00%, respectively).
So where do we go from here? I am not here to predict where rates are going, as predictions more often than not prove to be worthless. Rather a continued monitoring of the market and a reactionary rather than predictive positioning may be warranted.
Clayton Fresk is a Portfolio Manager at Stadion Money Management, a participant in the ETF Strategist Channel.
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