The Effect of Interest Rates on The Treasury Yield

Interest Rate Shopping

Thinking Independently

It’s Independence Day this week in the US and I wanted to talk about how independence is thinking for yourself and pointing out things you know are not right. Many times this means you have to be on your own or with a smaller group that’s going up against something large. And if you’ve been following me, you know that I’m a firm believer that the long-only Big-Box approach worked great in the 80’s and 90’s, but stopped working in 1999. That means people are going to have to question this huge institution and think for themselves.

Seven Charts of The US Treasury Yield and their Similarities

Below you will find seven charts of different treasury yields. Each chart dates back to 1982. In each chart there will be two red dots – where the stock market peaked in 2000 and 2007. And two green dots – where the stock market bottomed after their respective recessions and market falls. You’ll notice some interesting similarities in all of the seven treasury yield charts.

The Three-Month Treasury Yield

The chart below is of the 3-month treasury yield. You can see the yield line on this chart has been in a long-term falling pattern since 1982. Remember that The Fed controls this yield. The red dots are when the stock market peaked in 2000 and 2007. Notice how much yields fell after both red dots, which means yields dropped hard right along side the stock market’s 50% falls (note: the gray vertical bars are recessions).

In the 2000 Dot Com recession yields fell five percentage points. Similarly in the 2008 recession yields fell another five percentage points.  So what do you think will happen to this yield during our next recession? Say hello to a negative 4% yield on the three-month treasury.

3 month treasury yield

The Six-Month Treasury Yield

The chart below is of the six-month treasury yield. You’ll notice right away that this one and the three-month look very similar. Again, during both market falls and recessions, the yield fell five percentage points. Though slightly farther out on the yield curve, the Fed still has a lot of influence over this yield. I’m not sure what to make of it but I found it interesting that the six-month yield started to rise a full two years before the three-month yield.

6 month treasury yield

The One-Year Treasury Yield

This next chart is of the one-year treasury yield. Again you can see that the yield peaked right around the same time that the stock market peaked. But right after the stock market bottomed in 2002 the one-year yield still continued to fall.

And then notice how steep the yield increased between the bottom of the dot com drop (the first green dot) to the top of the market (the second red dot). That was a steep run. Notice how flat the move higher is this time around.

1 year treasury yield

The Two-Year Treasury Yield

The next chart is of the Two-Year Treasury yield. Again very similar to the three-month and the six-month. When the Dot Com crash happened and the recession followed the yield on the two-year dropped six percentage points and then five percentage points during the Global Financial Crises.  Again, as we move farther out on the yield curve, the market has the control over the rates and not the Fed. And this is interesting because the two-year yield bottomed in 2011 and has steadily increased higher since. Remember the Fed didn’t start increasing interest rates until December 2015, a full four years later.


2 year treasury yield

The Five-Year Treasury Yield

Now the five-year treasury yield. The stock market peaked in 2000 and the five-year yield was 7%. When the market fell in 2000 and the recession started just after that, the five-year dropped five percentage points. And then during the 2008 Global Financial Crisis the five-year yield fell to just 0.5%.

What’s interesting is that the five-year yield bottomed and started moving higher a full three and a half years before the Fed started moving rates higher. What did the market know that the Fed couldn’t see? And will the Fed get it right during the next recession?

Next, look at the trend lines on the five-year chart. The shorter trend line goes back to 1989 and the longer one goes back to 1983. Notice how they’re converging just above what will be 2018. That is a lot of upside resistance.

I’m not sure anyone can say the five-year yield has finished its 35-year downtrend until the yield clearly breaks above both trend lines.

The question is, will we see a new lifetime low for the five-year treasury yield when we go into our next recession? We know a recession is coming.  The question becomes can the five-year break above the two downtrending lines before the next recession, so it has plenty of room to fall. With the average five-year yield fall of about 4.75% its likely we’ll see a negative five-year yield during the next recession.

5 year treasury yield

The Ten-Year Treasury Yield

Next look at the Ten-Year treasury yield. The market is fully in control of the ten-year yield. You can see the same red and green dots. The red dots being the peaks of the stock market and the green being the bottoms.

The average fall in yields for the ten-year was 3.5 percentage points. Today the ten-year is barely at 2.5%. That means if we got another market fall and recession like 2000 and 2008, we’d see ten-year interest rates at negative one percent.

Notice the trend line next. The ten-year is still in a downward trend because the low in 2016 was slightly lower than the low in 2012. So this yield is still heading lower and/or has been trading sideways between 1.5% to 3.0% for the past seven years… depending how technical you want to get on those two bottoms. Either way, no one can call for an end to the 35-year bear market in yields until the ten-year cleanly breaks above that downtrending line and firmly sits and stays above 3.0%.

10 year treasury yield

The Demographics of the U.S. and its Affect

A lot of what’s affecting the ten-year yield chart has to do with demographics. 10,000 people a day are retiring in the U.S. And when people retire, their earnings runway goes away and at some point those long-only Big-Box Advisors tell them that they have to increase their exposure to bonds. And the “age determines your asset allocations” approach to investing is going to cripple people over the age of 60 financially over the next 20 years.

Because, as you can see in the charts above, we are getting close to that zero mark and the idea that you should be long bonds because of your age is an idea that is going to hurt people when this bond bull market finally ends in the next two years. If you are starting to think independently from the dogma of the long-only Big-Box adviser then you’re going to start asking the question, “what IS best for me?

The 30-Year Treasury Yield

The last chart we’re going to look at is the 30-year yield. In the 2000 Dot Com crash/recession the yield fell from 6.5% to 5.5%. In other words it didn’t change that much. You know why? Because BabyBoomers hadn’t started retiring in mass. BabyBoomers were still on their earnings runway. But not in 2008.  Notice what happened in the 2008 Global Financial Crisis when BabyBoomers lost their earnings runway?

That big drop in the yield (its in the second gray recession bar on the 2009 line) is absolutely panic buying into this treasury (again yields fall as price increases… price goes up if there is an increase in demand). Now, notice the two down trending trend lines. They’re still falling, in fact they’ve accelerated their downtrend. Until the 30-yield breaks out above those two downtrending trend lines, the 30-year yield is still firmly in its 35-year down trend.

Can you say negative rates anyone? And then what, a negative 10% yield on the 30-year? Probably not.

We are already in an era where the 60/40 balance allocation is ending. Just think how badly BabyBoomers money is going to get hit when the 30-year yield starts its rise from below zero to a neutral 6%. Their earnings runway will be gone and their “conservative” bond portfolio will be the source of their volatility and not their stocks. Just saying.

30 year treasury yield

What if Yields Hits 0% And Then Keep Falling?

The most important thing to realize about yields is that they rise and fall with stocks. They fall with recessions. And as of right now they are way too low to properly handle another recession. The question remains: could we see a 0% yield on the 30-year US Treasury? We’ll know soon enough.

And before you do anything with your money. You have to ask yourself, how independently are you really thinking. Independence comes with blame but it also comes with freedom. Stability. And Steadiness. Stay free.

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RC Peck, CFP