The complex topic of rising interest rates in Usa
The rise in the U.S. interest rates is a major concern for the financial community. The leading topic is structural: return of inflation and a Central Bank far less dovish than before. Furthermore, the Trump election and his proposals to cut taxes and boost spending via tax credits on infrastructure has fuelled strong reactions in the bond market.
A look to the market data suggest that, among the US Treasuries, one of the most interesting trends is that of the bonds held by foreign official and international accounts and it points downwards.
Between August 15th and November 9th, they decreased continuously by 239 billion dollars, and this could affect the US yield curve.
A look at the United States Government Benchmark Yield Curve shows that rising yield have overcome the left side of the curve of last January (6 months to 2 years maturities) and are now equaling the values of the right side as it was in January 2016 (2 to 30 years).
An interesting research of Ray Dalio of Bridgewater Associates (1), that explains how economy works, points out that, when we have a big amount of debt in the long-term cycle, the supercycle, in the following period of deleveraging may result that short-term interest rates would be generally kept low. History tells that the peak of debt in the supercycle had been reached in America in the middle of the 1930s, and probably now: this phenomenon could be also associated to financial repression that limits somehow the rising range of the short side of the interest rate curve.
Anyway, the control of the interest rates could be done on the shorter maturities, the longest maturities are more influenced by the market’s supply and demand.
Back to the yields curve in America (Chart 2), it is true that the main differences with the situation of early 2016 are in the left side of the curve (short term interest rates), but I think that the most interesting effects are on the right side. First, because in the right side of the curve, yields are just back to the values of last January, so there is more room for further increases regarding both, political and economic scenarios. Furthermore, the 30 years Treasury, the day Trump was elected, advanced the most in 30 years (see the graph below).
These considerations suggest to have a look at the chart of the curve of the 20-30 years Government Bonds: the historical curve from 1919 shows. We can note an interesting behaviour: the reversal of the curve from high to low is a very quick pattern, with a form of an inverted “V”; the reversal from the bottom is slower, assuming a stretched shape (a pattern also recurring in the former periods from 1790).
But another thing that we note in the chart, is that trend reversals are anticipated by divergences between the price curve and its oscillator. As you can see, such pattern is repeating now, but since it is associated to a long term view it could take years to develop, especially in an upward reversal that, as noted before, is very slow and should be, anyway, confirmed by the prices that still are confined by a downtrend.
But another confirm by divergences is evident also in the weekly graph.
It is reasonable to think that these signals, although premature, shouldn’t be underestimated. Investing now in long term Treasuries, just because they look oversold, requires caution. Surprises might not be over yet.
- http://www.economicprinciples.org/wp-content/uploads/ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings.pdf
Mario Valentino GUFFANTI
(CFTe – SAMT Vice President – Swiss Italian Chapter – mario.guffanti@samt-org.ch)
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.