10 Year Treasury Breaks Through Key Technical, New Fed Chair Confirmed

The 10 year Treasury peaked at 2.63% in March 2017 and back in September 2014, so last week’s spike up to 2.67% is significant. The next level to test is the 2.70 to 3.00% range last reached in Dec 2013 to April 2014. The 2 year Treasury is hitting highs not seen since 2008 (about 2.06%). Is the yield curve flattening? The 2 year T, 3 year T, 5 year T and short term LIBOR all hit near decade highs. The short end of the curve is moving. Yields are being buffeted by news and expectations: Inflation watch-Oil prices are rising and stabilizing above the key $60 per barrel number, US unemployment is dropping as jobless claims hit a record low, the Tax Reform’s repatriation feature is in the news as Apple is bringing a quarter trillion dollars into the US (other companies are expected to follow, pushing GDP and inflation), the ECB is tapering their bond buying, Bank of Canada raised rates and signaled two or three more increases this year. The Wall Street Journal economist survey indicates a 2.74% 10 year T at mid-year and 2.98% at year end. All in loan rates for 10 year full leverage loans should be around 5.00% which may diminish equity returns as sellers typically lag before capitulating on cap rates. The confirmation of a new Fed Chair (Powell) has been overshadowed by shutdown drama in Washington. The short term bill passed this week expires on February 8, that’s when things get interesting. The next funding bill will also need to include a debt ceiling increase (note that a default can wreak havoc in worldwide capital markets, aka, all bets are off at that point). With the contentious and divisive immigration debate seemingly driving the budget process, this could be another “fiscal cliffhanger”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners