BIG, BEAUTIFUL DEFICITS?
Hello and welcome back to the No Straight Lines Investments blog, I am grateful for your time and attention.
The U.S. 10-year treasury yield poked it’s head above 4.5% this week, rising 7 bps.
If we mark the start of the current bull market in October 2022, the chart below shows that nearly all of the S&P 500’s gains have come while the 10-year yield stayed below 4.5%—a clear signal of the pain threshold for equities.
There is little ambiguity to the yield level that inspires equity anxiety, therefore no great revelation that stocks struggled this week:
One of the (many) maddening aspects of investing is that relationships amongst variables are not stable.
For example, during the bull market of 1997-2000, the average 10-year treasury yield was 5.75%, and that clearly did not act as a headwind to equity returns.
The low in treasury yields in this time series is 4.2%.
The average yield on 10-year treasuries is 4.7% going back to 1790.
What was the root cause of the latest yield surge >4.5%?
Big, beautiful deficits to the horizon is what.
As Michael Hartnett of BofA points out, the U.S. federal budget deficit has averaged 9% of GDP over the past 5 years.
A principal aspect of the Moody’s downgrade last Friday was the fact that they foresee budget deficits continuing at that level thru to 2034.
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