Highlights:
Treasuries have returned to an inflection point that was established in 2022
They return to that point in front of the potential lower inflation surprises that we highlighted earlier this week
A move below that inflection point on inflation surprises could add fuel to the credit-led equity bull market
The yield on the 10-year Treasury has fallen back down to an inflection point that has existed since late 2022. If it falls below that level due to the lower inflation surprises that we forecasted on Tuesday, the debt-fueled equity market could see further strong gains.
In 2022, the 10-year surged up to 4.25% area because of the Fed’s tightening.
In early 2023, it fell below that level on a slight to safety as U.S. banks began to go out of business overnight.
The Fed and the Treasury brought that crisis to a close within a few months, so people who bought Treasuries in a panic were hit with losses.
Last August, the Treasury Department announced they would borrow more money than expected, as that would stop a new debt ceiling battle in early 2025. That sent yields surging in August, September, and October of last year.
However, in October, we noted the Treasury had reached their borrowing goal early, which resulted in a drop in bond prices and a boost to stock prices starting in November.
This year, the Treasury’s cash balance rose even more, leading us to call for borrowing cuts. However, the Treasury said they would keep that cash balance, again likely to fight off a debt ceiling battle, so we termed that decision as a near-term negative but a longer-term positive.
That longer-term positive seems to have arrived sooner than we thought it would have, as the yield on the 10-year has fallen to 4.32% this morning, in rage of that key 4.25% area.
Our main theme is that stocks are in a credit-led equity bull market, fueled by pensions putting money into credit, allowing companies to buy back stock. A move below the 4.25% area on the 10-year because of positive inflation surprises would likely throw bearish investors offside and provide even more money for stock buybacks to push equity prices higher.
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