American stock indices ended in the "minus" trades on Friday. Stock markets in the Asia-Pacific region on the first day of the week are declining. Oil of reference grades becomes cheaper on Monday.

American stock indexes finished trading in the red on Friday amid an increase in the yield on 10-year US Treasuries to 3.22%. Just a month ago, the figure was 2.88%.

Investors also assessed statistical data on the labor market and foreign trade USA.

As it became known on Friday, unemployment in the US in September fell to the lowest since 1969 3.7% compared with 3.9% in July. Meanwhile, the number of jobs in the US economy increased by only 134,000 last month.

Analysts, on average, expected an increase in the number of jobs by 168 thousand and a decrease in unemployment to 3.8%.

Falling unemployment speaks of full time and will become another argument in favor of raising the rate of the Federal Reserve System (Fed), while experts explain the worst-than-expected growth in the number of jobs by the effect of Hurricane Florence.

The average hourly wage in the US last month increased by 0.3% compared to August and by 2.8% in annual terms, both indicators coincided with market expectations. Annual wage growth has slowed only marginally since August, when it stood at 2.9%, the highest since 2009.

Meanwhile, the US trade deficit in August widened to its highest since February of $53.2 billion from a revised $50 billion in July.

Imports of goods and services in the United States in August increased by 0.6% and amounted to a record $262.67 billion in history, the volume of exports fell by 0.8% since July and amounted to $209.4 billion.

The deficit of trade turnover with China the month before last increased to another record, amounting to $38.6 billion against $36.8 billion in July. The negative trade balance with Mexico increased from $5.5 billion to $8.7 billion, the balance deficit with Canada decreased to $2.7 billion from $3.2 billion, with the EU - decreased to $15.7 billion from $17.6 billion.

The price of Tesla Inc. fell 7.1% on statements by Greenlight Capital CEO David Einhorn that the company could suffer the same fate as Lehman Brothers in 2008.

Shares of retailer Costco Corp. fell by 5.6% on the data that the company checks the system internal control reporting.

Share price of Snap Inc. dropped by 0.4%. The owner of the SnapChat social network has set a profitability goal for himself for the next year, follows from the appeal of the company's management to employees.

Oilfield services company Precision Drilling's capitalization fell 2.9% on news that the company plans to merge with rival Trinidad Drilling, valuing the company at $1 billion.

The price of GE securities rose by 4.1%. Earlier, the board of directors approved a cash reward plan for the company's new CEO Lawrence Culp. His salary will depend on how much the company's shares rise during his leadership.

The Dow Jones Industrial Average on October 5 fell by 180.43 points (0.68%) and amounted to 26447.05 points.

Standard & Poor's 500 fell 16.04 points (0.55%) to 2885.57 points.

The Nasdaq Composite lost 91.06 points (1.16%) to 7788.45 points.

Stock markets in the Asia-Pacific region on the first day of the week are declining.

Exchanges in Japan do not work due to a public holiday in the country.

The Chinese Shanghai Composite index fell 2.92% by 08:35 Moscow time, trading on the site resumed on Monday after a week-long break due to holidays. The past week was characterized mainly by negative dynamics in Asian stock markets, and China is winning back this trend on Monday, experts say.

As it became known on Monday, the index business activity in the service sector in China, calculated by Caixin Media and Markit, rose to a three-month high of 53.1 points in September compared to 51.5 points in August and 51.4 points a year ago. Consolidated PMI increased to 52.1 points from 52 points in August and 50.6 points in September last year. The value of indicators above 50 points indicates an increase in business activity.

The Hong Kong Hang Seng fell by 0.65% by 08:35 Moscow time, being "in the red" for the fifth session in a row.

The price of securities of the Internet giant Tencent Holdings Ltd. decreased by 0.7%, the developer Country Garden Holdings - by 4.2%.

At the same time, shares of representatives of the financial sector are rising in price, including insurers AIA (+0.3%) and China Life (0.35%), as well as banks Bank of Communications (+1.4%) and Bank of China (+0.3%).

The value of the South Korean Kospi index decreased by 0.2% by 08:50 Moscow time.

However, the capitalization of one of the world's largest semiconductor manufacturers Samsung Electronics Co. rose by 0.8%.

The Australian stock indicator S & P / ASX 200 on the basis of trading on Monday fell by 1.38%, which is the maximum drop since the end of March. The negative impact on the market had, among other things, a decrease in oil prices.

The market value of the world's leading mining companies BHP Billiton Ltd. and Rio Tinto Ltd. fell by 2.8% and 1.6% respectively, alumina producer Alumina Ltd - by 6.9%.

In addition, the price of the largest Australian banks Commonwealth Bank of Australia - by 0.9% and Australia & New Zealand Banking - by 2.6% fell.

Oil of reference grades is getting cheaper on Monday on the statements of representatives of Saudi Arabia about their readiness to compensate for the reduction in fuel supplies from Iran at the expense of free capacities.

December futures for Brent crude on the London ICE Futures exchange fell by $0.79 (0.94%) by 8:22 Moscow time to $83.37 per barrel. At the auction on Friday, their price fell by $0.42 (0.5%) and amounted to $84.16 per barrel at the close.

WTI futures price for November at the electronic trading of the New York commodity exchange(NYMEX) fell by this time by $0.55 (0.74%) - to $73.79 per barrel. According to the results of the last session, their price increased by $0.01 (0.01%), ending the auction at $74.34 per barrel.

Saudi Crown Prince Mohammed bin Salman said his country currently produces close to a record 10.7 million barrels of oil per day and could increase the figure by 1.3 million b/d if necessary.

In addition, according to him, the authorities of Saudi Arabia and Kuwait are close to an agreement on the resumption of production at two jointly developed fields, the potential production of which is 500,000 barrels per day.

Meanwhile, sources close to the administration of US President Donald Trump say that US authorities are negotiating with states that want to continue buying oil from Iran after sanctions against the country come into force on November 4.

In particular, an exception may be made for some countries and they will be allowed to import oil from Iran. Previously, the US authorities ruled out such a possibility.

May 10, 2019 19:07 May 10, 2019 18:27 May 10, 2019 15:50 May 10, 2019 15:34 May 10, 2019 13:15 May 10, 2019 12:26 May 10, 2019 11:31 10 May 2019 11:11

"The dollar fell sharply on Thursday, causing the pair to rise from 1.1190 to 1.1250. In general, the rate remains within the downtrend, but since the end of April it has been moving from its lower border to the upper one. At the moment, the resistance of the trading channel is passing through 1 1270. Even earlier, at 1.1255, the pair might...

When investing in bonds, it is important to always understand what is happening with interest rates in the market and how it is changing. These factors determine profitability and influence the price. But even if you do not invest in debt securities, you should still monitor the yield of US Treasury bonds or. And that's why.

1. Treasury returns reflect market sentiment

The dynamics of the yield of US Treasury bonds reflects the mood in the market (complementing ) and allows you to assess the appetite for risk.

As you know, bond yields and prices move in different directions: when one rises, the other falls and vice versa (I write more about this).

In this connection, the growth of yield on debt securities indicates a decrease in the price of bonds. A decrease in the price of bonds is due to the fact that investors sell bonds for the sake of investing in shares. Therefore, rising yields are bearish for bonds and bullish for stocks.

Conversely, when yields fall and the price of bonds rises, this is a sign of doubt in the market. Since in this case, money begins to flow from risky assets to a safe harbor and there is a high probability of a decrease in shares (I write more about this).

What to use as an indicator of profitability? To estimate the yield, the yield of 10-year US Treasury bonds (10-year Treasury Yield, $TNX) is usually used. This is due to the fact that in the US debt market the rates on mortgages and bank loans are tied to the yield of 10-year securities.

2. Treasury yields provide an indication of economic activity

The Treasury yield curve is a leading indicator that can be used to judge future economic activity (how to use this signal, I write).

If the yield curve has a Normal Yield Curve, then market participants expect the economy to accelerate and interest rates to rise. If the curve takes an “inverted” form (Inverted Yield Curve), then market participants expect a slowdown in the economy and lower interest rates.

Reverse and normal bond yield curves. The downward slope of the yield curve means that short-term rates are higher than long-term ones.

Where can you find the yield curve? For analysis current state I use the Dynamic Yield Curve service at Stockcharts.com or track the following symbols on the chart: $YC2YR and $YC3MO.

• $YC2YR reflects the difference between 10-year ($TNX) and 2-year US bonds ($UST2Y).
• $YC3MO reflects the difference between 10-year ($TNX) and 3-month US bonds ($UST3M).

3. Treasury returns help manage risk

Changes in 10-year US Treasury ($TNX) yields affect different asset classes differently. Understanding this interaction or, as they say, helps in asset and risk management.

There is a direct relationship (positive correlation) between $TNX and:

• broad market index S&P 500 (SPY): $TNX rises – so does SPY;
• financial sector (XLF), bank shares (KBE, KRE) and brokers (IAI): $TNX is growing – these assets are also growing (XLF/SPY dynamics is very close to $TNX);
• copper ($COPPER), oil ($WTIC) and the Nikkei 225 ($NIKK): all three tend to rise when $TNX rises;
• US dollar (UUP): $TNX grows - the dollar strengthens.

There is an inverse relationship (negative correlation) between $TNX returns and:

• gold (GLD), Japanese yen($XJY): both stocks tend to decline when $TNX rises;
• real estate (VNQ), consumer (XLP) and utility stocks (XLU): these sectors usually weaken when $TNX rises.

These interactions may not be performed, however, as experience shows, they are better considered than ignored.

What person does not dream of being financially independent? Probably everyone. By at least, many people think that it would be nice not to live paycheck to paycheck, not to count a penny, not to rely on a kind boss and are not afraid to tell him something that he might not understand, not to adapt to his mood, and, in the end, do what you love, active leisure, indulge in simple things, such as an annual vacation at sea, entertainment on weekends, repairs in an apartment, and then a good car and a country house.

These dreams seem like a fairy tale for many, as people do not know where to get additional income, or simply refuse to invest money somewhere, as they are afraid of losing their last savings. This is the syndrome of the 1990s - the syndrome of distrust of the national financial system, which with enviable regularity failed. But it is amazing that even in such unfavorable conditions, people have appeared who know how to earn money and invest it wisely, thereby increasing their income. These people lead by example, inspire others through mutually beneficial cooperation, and enhance the overall well-being. After all, investment and personal growth are important components of a successful person.

On the Internet, and just in life, you can meet many such people. Their motto in life is “Dream. Target. The real result." They build their own lives. Already in their 20s, they have been actively and successfully investing cash in various financial instruments and are already financially independent, despite the fact that he continues to work at his favorite job. In their blogs, they talk about themselves and their hobbies, and most importantly, about their experience. successful investment. Some of them offer everyone advice and assistance in this matter. Of course, among them there are scammers, but there are also a large number of honest people who seek to raise funds that would bring profit to both investors and themselves.

It turns out that getting 10% income from investments every month is quite real! The basis of investment is trust management on Forex, and various investment clubs and companies investing in shares of enterprises and projects real sector. Each such company or club is managed by businessmen with an impeccable reputation and has had very good results of work for many years. These companies offer various ways investments - deposits, transfer to trust management, purchase of shares, etc. ABOUT the best tools you can learn directly from their publications, visiting financial websites and blogs, communicating in person. Each such company or club, of course, needs to be checked. In no case should you immediately invest large amounts of money in one company or put all the money on an all-in PAMM account. Diversification in this case is the surest way to reduce risk.

Separately, it is worth mentioning PAMM accounts. Not everyone can work on Forex on their own. Someone does not have enough endurance, someone has time to study all the intricacies of trading. A PAMM account provides an opportunity to invest money in Forex without having knowledge and experience in this area. Investing in PAMM accounts is quite safe. Ratings of PAMM accounts on the Internet indicate a yield of several hundred and even 1000% per annum, and at least more than 10% per month.

Also, practice shows that it is certainly worth investing during a crisis, in particular in blue chips, the price of which in the initial period economic downturn usually falls sharply. In the recovery process after the crisis, the price of these shares begins to rise. As a result, in a year you can increase your capital by 2-3 times, which again corresponds to 10% per month or more. So, for example, in the period from the beginning of January 2015 to the beginning of September 2016, the value of the shares of PJSC Sberbank of Russia tripled. Shares of many other companies also rose significantly.

Thanks to websites, blogs, special books on investing, you can significantly increase the level of well-being and get closer to financial independence. But that is not all! Some of these books are distributed on the Internet for free among everyone. Books with more detailed description financial markets and the secrets of investing can be bought for little money. These books will be very useful both for those who are familiar with investing in general and in particular with investing in trust management on FOREX or in stocks. large companies as well as newbies. Typically, such books clearly and competently describe the main investment tools.

A novice investor on the Internet and with the help of special literature can easily learn about money and secrets effective management them, about investments, about the rules and principles of investing, about what FOREX is, how you can earn on FOREX and about trust management on foreign exchange market, and, finally, about the selection rules investment company, trust, risk and asset diversification. A desktop guide to investing in trust management in the Forex market. Having such books, a novice investor will be able to avoid many of the mistakes that were made by their predecessors due to lack of information.

As in any other business, the main thing for successful investment is the presence of desire. And the rest will follow.

In today's article, we will look at the factors that affect the pricing of 10-year Treasury bonds and their futures, find out in what periods investors "run to safety", when and in what volume they receive income on bonds, find out why bond yields and their prices have an inverse correlation, as well as how their yield curve relates to the business cycle.

In this article:

• How the price of 10-year Treasury notes is formed
• What the Interest Rate on 10-Year Treasuries Says
• What are 10-year treasury note futures
• Factors Affecting 10-Year Treasury Note Futures

Introduction

Debt government bonds play on financial market important role. During a recession and stagnation in the economy, they become one of the main financial instruments where capital flows. It is in such difficult times for the economy that investors tend to buy debt government bonds, and not invest in stocks, since the risk of losing investments by stock market in an economic downturn is very large. Moreover, even under conditions economic growth, owning only shares of companies is irrational.

Therefore, to protect your investments in the stock and other markets, it becomes a reasonable decision to invest part of the funds in US government debt bonds. When the US government wants to attract money from ordinary citizens or investors, including other states, it gives them the opportunity to invest their savings or capital in fixed term at a certain interest rate.

But why is the US government turning to borrowed funds? The main reason lies in the fact that the receipt of income and spending budget funds happens unevenly. Government revenues come in at specific times (for example, tax revenues), while expenditures are constant. Therefore, the government has the ability to borrow short-term funds and return them after taxes are received. Besides money market in the form of debt bonds offers relatively cheap resources. To do this, the US Treasury (Department of the Treasury), through its Bureau of Public Debt, issues four types of government bonds: short-term treasury bills (T-Bills), medium-term treasury bonds (T-Notes), long-term treasury bonds (T-Bonds ), Treasury Inflation Protected Bonds (TIPS).

Properties of 10-year Treasury Notes

Treasury bonds (long-term treasury bonds - T-Bond) and notes (medium-term treasury bonds - T-Note) of the United States are the object of close attention from all investors in the debt market, regardless of the size of their investments in state debt or the stock market.

Among various kinds treasury securities, 10-year treasury notes occupy a unique position in terms of their maturity or duration (eng. duration - duration), which makes them one of the most monitored debt instruments, because about 60% of all issued treasury securities account for them .

10-year treasury notes are ten-year money loan the US government. 10-year Treasury notes, or T-Notes, offer a return or rate of return for investing, essentially for lending money to the US government. The income or rate of profit serves important indicator treasury securities market and acts as a benchmark for determining other interest rates. T-Note are the most common medium-term coupons securities USA with a maturity of 10 years.

Yield on 10-year Treasury notes is often controlled by the Federal backup system United States (U.S. Federal Reserve System - FRS) and is considered one of the factors affecting the change in the FRS interest rate. Unlike short term discount rate on the funds of the Fed, established central bank, 10-year notes are sold at regular auctions, allowing the free market to determine the yield on these notes. The yield on 10-year Treasury notes determines the level of confidence of bond investors in the US economy. Like all Treasury securities, 10-year notes are considered "risk free" because they are backed by the full confidence and integrity of the US government.

10 Year Notes can be purchased directly through TreasuryDirect.com for a minimum of $100. You can also buy them at a bank or from a broker or dealer in US Treasury securities. Derivatives financial instruments of these securities are 10-Year T-Note Futures.

How is the price of 10-year Treasury notes formed?

The price of 10-year Treasury notes is affected by a combination of various factors, such as:

Nominal cost: also called par or face value, which the US government undertakes to pay bondholders at maturity.

Dollar price: is the amount in US dollars that an investor pays for a bond in relation to its face value.

Interest rates: This is the amount of interest that the US government is obligated to pay to the holder of a bond over the life of the bond. The rate at which interest is paid and the amount of each payment are fixed at the time the bond is offered for sale.

Yield: is the combination of the dollar price and the interest rate on the bond paid over its life. It is expressed as a percentage.

10-year Treasury notes are sold through an open market auction. They are sold to the bidder who offers the highest price for them. Demand also affects the price of Treasury notes. In case of low demand for 10-year notes, they can be sold at a discount to their face value (English discount to face value). For the buyer of such a note, this means that he receives a higher interest rate on this debt instrument. Conversely, when there is a high market demand for these Treasury notes, they are sold at a premium to face value. In such a case, the buyer receives a lower interest rate on such a debt instrument.

Interest payments on 10-year treasury notes occur once every six months, and the face value is fully returned to its owner at the end due date note redemption. For example, if you bought such a security at auction and held it until maturity, then in total you will receive the face value plus interest accrued over 10 years.

By purchasing a 10-year Treasury note, its owner can:

• Hold it while waiting for its maturity, receiving at the end of the term the amount originally paid by him, called the "principal". Since this amount is determined by the par value of the bond, the par value of the bond and the "principal" can be understood as identical concepts;
• Sell ​​it on the secondary securities market. When he sells a 10-year note, he gets only the current dollar price for it, not its face value, which in some cases can lead to investment losses. 10-year notes can be traded on the secondary market at a price above par, at par or at a discount.

There are many reasons why bondholders will want to sell or buy Treasury securities on the market, and we'll talk about those in the rest of this article.

Interest rate on 10-year Treasuries

The interest rate on 10-year Treasury securities is the yield to maturity of those securities that were most recently auctioned. Do not confuse it with a fixed interest rate payable. Yield to maturity is determined by the market value of the treasury price of the security and the coupon rate. 10-year Treasury interest is one of the most widely reported metrics financial resources information, as it affects many lending rates such as US mortgage rates.

The bottom chart shows 10-year Treasury interest rate data since 1962, with the shaded portions of the recession periods.

10-year treasury note futures price chart with 6 decimal places

Factors Affecting 10-Year Treasury Note Futures

When trading 10-year US Treasury notes, futures traders need to monitor a number of different factors that affect their price. Due to their maturities, they are among the most frequently tracked and traded debt instruments. Therefore, although this indicates their sufficient liquidity, nevertheless, the futures and money markets, as well as the secondary securities market, are subject to the influence of the psychology of traders and investors. Therefore, below are a number of factors affecting the cost of 10-year note futures.

"Safe Harbor": given the maturity of the 10-year notes and the fact that treasuries are backed by full confidence in the good faith of the US government, they are often in high demand as a safe-haven asset. Demand for them, known as the flight to safety, rises at times of rising geopolitical tensions outside the US.

The chart below shows one such example, where the price of 10-year Treasury Note futures skyrocketed in just 24 hours due to the uncertain outcome of the Brexit referendum.

Over the course of 24 hours, demand for 10-year Treasury note futures surged amid worrisome Brexit uncertainty.

A vote of confidence in the economy: Investors often use 10-year Treasury yields as a vote of confidence in the US economy. In this case, the principle is that a growing economy encourages investors to reorient their funds into high-risk assets, which tend to rise during the period strong economy. In turn, this leads to a weakening of demand for 10-year Treasury note futures, thereby raising their yields.

The chart below shows how, for most of 2016, bond investors were wary of the future of the US economy, lowering their yields as demand for 10-year Treasury notes soared. After a series of events (such as Brexit, etc.), yields began to slowly rise again and shot up after the November US presidential election, when Donald Trump promised to increase budget spending. At the same time, the American economy was rushing forward at full speed. Rising bond yields gave the green light to the US Federal Open Market Committee in December 2016 to comfortably raise the base rate from 0.5-0.75% to 0.75-1%. Prior to that, the Fed raised rates in December 2015. And this was the third rate increase by the regulator in the last 10 years (the Fed radically lowered rates to almost zero during the 2008-2009 crisis and has not increased them for a long time since).

The yield on 10-year Treasury notes (inversely proportional to their value) demonstrates low level confidence for most of 2016.

Treasury yield curve: The yield curve is one of critical aspects when working with bonds or their futures. Much becomes clear from the yield curve in conjunction with the current economic cycle. The yield curve is a comparison of the interest rates (yield) of all Treasury securities, from 1-month Treasury securities (1-month T-Bill) to 30-year Treasury bonds (30-year T-Bond). 10-year Treasury notes (10-year T-Note) are located approximately in the middle.

In an efficient economy that demonstrates good performance growth, the return on the short side of the curve is lower, while on the long side it is significantly higher. In this case, this yield-to-maturity ratio of Treasury securities makes up for the additional risk that investors' money will be frozen for a long time and they will not be able to use it. When bond investors are confident that the economy is starting to slow down or is at the end of the current business cycle, the yield curve can change exactly the opposite. In this case, the yield on short-term Treasury securities will be higher than on bonds with long maturities.

The above factors are among the most important and capable of significantly influencing the mood of market participants day by day and market value 10-year treasury note futures. Those who plan to trade these futures absolutely need to take into account many more factors that can affect their value, including international geopolitical events and macroeconomic indicators, especially from Europe and Japan. US Treasury securities themselves can be considered as one of the worthy investment instruments, but still with the aim of preserving the invested funds, rather than for real profit.

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It's done! The yield on 10-year US government bonds has reached a critical level of 3%.

What triggered the growth of Treasuries yields, and how does this threaten the US market?

Why are yields rising?

To begin with, I note that the growth of Treasury yields means a fall in the bonds themselves. As a rule, in the case of global trends, unidirectional movements are observed for all benchmark issues (with different maturities).

There are also nuances. Movements in yields are often positively correlated (interconnected), but have different amplitudes due to differences in durations ( weighted average terms to maturity - how the price of a bond reacts to a change in yield), as well as a different reaction of government bonds to the same fundamental factors.

As a rule, the growth of Treasuries yields is caused by:

Tightening monetary policy Fed

When the Fed Raises interest rates or takes other measures to tighten monetary policy, then there is less "cheap money" in the financial system. As a result, market participants no longer have so many opportunities to buy government bonds. Bonds are falling and yields are rising.

Intuitively, this is especially obvious when the QE programs are minimized and the reverse process is started. Fedrezev has about $2.4 trillion Treasuries on his balance sheet, with a total US debt of about $21 trillion. When buying up bonds or reinvesting free funds in them stops, the treasury market loses an important strategic buyer. In the distant future, the regulator's balance sheet is supposed to be unloaded, including the sale of assets.

Curtailment of monetary incentives by other central banks

Often, developed-country sovereign bond yields rise in unison. The fact is that when the Fed raises rates, there is less "cheap money" not in the States, but around the world. Moreover, stimulus rollbacks can take place simultaneously in several regions, which exacerbates the situation. There are differences in the economies of various countries, but global trends remain in force.

At the same time, the monetary policy of the world's leading central banks (the Fed, the ECB, the Bank of Japan, the Bank of England) does not change synchronously. As a result, the spreads between the yields of various sovereign bonds widen or narrow. That is, there are opportunities for arbitrage and playing on changes in exchange rates.

For example, on this moment there is a serious discrepancy (spread) between the yields of US and German government bonds (Treasuries and Bunds). Other equal conditions, this is a factor in favor of the strengthening of the dollar against the euro. Key risk for American currency- Donald Trump's protectionist rhetoric.

US inflation

The higher inflation, the more reason the Fed has to raise rates. For a long time, inflation in the United States (and in other developed countries) was low despite the global economic recovery. The situation surprised even Janet Yellen. Part of the reason was structural features, including the development of e-commerce.

The key inflation indicators are consumer inflation (CPI), producer inflation (PPI), as well as price indices consumer spending(PCE Indices). The latter is the Fed's favorite metric and is targeted at 2%. Inflation indicators are common and basic, that is, cleaned from food and energy carriers (volatile components).

According to the CPI index, inflation in the US began to slowly accelerate. In March, the index rose 2.4% year-on-year. There is an interesting indicator key rate Fed net of core consumer inflation (real rate). So far it's still negative.

Inflation as such is a look into the past. Inflation expectations are important. They are fueled by rising prices for raw materials (energy carriers), an increase wages, launching a fiscal stimulus program (tax cuts and possible expansion of infrastructure spending).

Inflation expectations in the US are tracked based on the inflation-protected Treasuries (TIPS) market. According to the 5-year plans, now we are talking about the level of April 2013 - about 2.1%.

The state of the economy

It's all pretty banal. The better the economy develops, the less the need to buy protective assets, which are bonds. Moreover, economic growth is theoretically capable of fueling inflation and inflationary expectations.

In this regard, GDP is considered to be a classic indicator, but here the data is clearly lagging behind the course of events, and is also repeatedly revised. Interesting is the assessment of the FRB of Atlanta (GDPNow service) on GDP for the current quarter. This assessment is built on the basis of the incoming stream of macro releases and is quite “fresh” and flexible.

Now the GDPNow forecast assumes a 2% increase in US GDP in the first quarter. The first assessment of the indicator will be presented on Friday, 27 April.

As a result of the implementation of the Trump program in 2028, the US national debt could reach $29.9 trillion compared to the current $21.1 trillion. I note that at the end of 2017, the US debt-to-GDP ratio was 106%. So far, the country is in 12th place in the world in this indicator, but it is still ahead. For example, in Japan we are talking about 240%, but here most of the papers are held by domestic investors.

Here the alignment for the bonds themselves is negative and plays in favor of yields. There is active fiscal stimulus at the peak of the economic cycle. If the Trump project is implemented, expectations of an increase in the budget deficit and the debt burden of the States will strengthen inflationary expectations. As a result, from the era low rates will obviously have to be turned off. Moreover, the growth of the US debt burden, in theory, can increase the country's sovereign risks, putting pressure on the treasurer. So far, this is a conditional factor, because we have a conditionally risk-free instrument.

However, in the long term, there is a threat that China (the largest "foreign" holder of Treasuries) is able to slow down purchases of bonds or even start selling them, especially in the event of a tightening of its own monetary policy following the Fed, and even more so the start of trade wars

What does this mean for the US market?

Growth in government bond yields is generally negative for the stock market. I note that the relationship is not linear, but general trends are often traced.

Dynamics of assets since 2013, weekly timeframe

A sharp increase in government bond yields means tightening financial conditions, so it could put pressure on the stock market. At the moment, the dividend yield of the S&P 500 index (1.85% per annum) is already noticeably lower than the yield of 2-year Treasuries (2.5%).

The current situation is especially dangerous for the traditional dividend sectors - telecoms, energy, REITs. Everything is simple here, the higher the yield of long government bonds, the less interesting earnings on dividends. It is much easier to invest in relatively risk-free assets without being exposed to the specific risks of stocks.

This means that dividend stocks need a drawdown in order to successfully compete with treasuries. Let me remind you that an increase in dividend yield is often observed when stocks decline.

Enterprises with an already high debt burden are especially sensitive in this regard. Exceeding a debt/equity ratio (D/E) of 70% is already a risk factor, not to mention over 100%. The graph clearly shows that in last years American corporations were increasing their debt burden, in contrast to the deleveraging trend in Europe and Japan (data are given excluding the financial and technology sectors).

Another point is in the field of corporate finance theory. Analysts often calculate the fair value of shares based on discounted cash flow (DCF) models. According to these models, the expected cash flows adjusted to the present period using a discount rate. This rate depends on the risk-free return and is in the denominator in the calculations.

Accordingly, the higher the risk-free rate, the lower the estimated fair value shares. Such an alignment can provoke large portfolio managers to sell shares when strong growth yields of Treasuries, as well as to the revision of targets by investment houses.

Let's not forget that the higher the yield of bonds, the stronger the dollar should look. To assess general trends, there is an index of the dollar (DXY), which shows the dynamics of the "American" against a basket of world currencies.

The higher interest rates in the US compared to rates "abroad", the more attractive the dollar for purchases. In addition to rates, as such, the US currency is affected by the state of the US economy and a number of other factors. Again, an improvement in the economy drives up inflationary expectations, which means it pushes interest rates up.

The strength of the dollar, along with the growth of bond yields, means a tightening of financial conditions, which is so dangerous for the stock market. Moreover, the growth of the US currency is not beneficial for US exporters, which account for a decent part of US corporations from the S&P 500 index.

Where can 10 year olds go?

Let's take the 10-year yield as an indicative indicator. 3% - this is not just some kind of round number, but also static resistance. If the yield consolidates above this level, that is, it stays above 3% for a couple of days, the next target will be 3.2%. As a result, the US stock market will be under pressure.

I note that the 30-year yield is also at an important resistance - 3.2%. The increase in the indicator has already led to an increase in mortgage rates, which in the future may negatively affect the real estate market. Meanwhile, the yields of many short issues are at the level of the post-crisis 2009.