Stansberry Research

Monday Morning Market Comments

C. Scott GarlissStansberry NewsWire

Morning Market Commentary:

  • The current rate-hike cycle from the Federal Reserve is drawing to an end.
  • The central bank has endorsed a peak rate of 5.1% for next year compared to the current 4.5%.
  • The 10-year U.S. Treasury yield is breaking down through its moving averages.

Treasury yields are headed even lower...

Last week, we discussed the outlook for domestic interest rates. Specifically, we're focused on how much higher the Federal Reserve will raise the federal-funds target rate. After all, since the start of 2022, it has risen from a range of 0% to 0.25% to the current 4.25% to 4.50% range.

Take a look at the following chart. The current rate-hike cycle has been the most aggressive since 1980. And based on the current guidance from the central bank (dotted line), there isn't much further to go from here. But the change resulted in 2022 being one of the worst years on record for bond-market returns... as well as the traditional 60/40 portfolio.

So, naturally, investors want to know if this will continue to be the case this year... or if the worst is behind us.

After all, money managers are always looking for the most opportune moment to invest. They want to capture the greatest upside return. Remember, the idea is to invest in what the economy will look like eight to 12 months down the road and not what it looks like right now.

Based on what we're seeing in the bond markets and U.S. Treasury yields right now, it seems the aggressive rate-hike cycle is close to hitting its zenith. And that means the upside potential for stocks and bonds is rapidly improving.

But don't just take my word for it. Let's look at some of the metrics...

First, we want to examine the yield on 10-year U.S. Treasury. That rate is important for the economy because it's used as a benchmark for all types of lending. If it's headed lower, that means domestic borrowing costs are likely to do the same.

As you can see in the chart below, the yield peaked in October 2022 at 4.25%. That tells us that bond investors believe the Fed is winding down the rate-hike cycle. Timing the end is a difficult thing to do... So rather than wait for the exact moment, money is being put to work now to lock in high yields.

Next, let's look at what's going on with the 10-year U.S. Treasury yield compared to its 200-, 100-, and 50-day moving averages. These will give us an idea of the technical momentum. In other words, we can use these moving averages as points of support or resistance. If the current level is above one of those averages, it acts like a floor (support). But if the current level is below the average, it acts like a ceiling (resistance).

As we can see, the 10-year U.S. Treasury yield is breaking down through all of its support levels... By looking at the averages over time, we're getting a better idea of the trend rather than the price right now. This is another sign that investors think the current rate environment isn't going to improve.

Tomorrow, we'll look at two-year U.S. Treasury yields and anecdotal evidence supporting the case for peak yields...