Bonds: Not Buying It

It clearly didn’t matter to stocks when 10Y futures broke down last month from the appreciation channel dating back to May 2018. ZN’s decline was gentle, contained. And, weren’t higher rates a sign that the economy was recovering and inflation picking up as desired? Powell repeats this mantra every chance he gets. Besides, stocks have dutifully continued their “reflation” meltup.

But, in the back of everyone’s mind: at what point would higher interest rates become a problem? With the national debt closing in on $30 trillion, higher rates would seem to be an important issue. Future earnings obviously aren’t worth as much when discounted at a higher rate. What would happen if market forces took over and rates shot up, out of control?

While breakdowns are cause for caution, breakdowns from breakdowns are often cause for alarm. That’s where we are today. And, yes, it could be a big problem.

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