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US 10YR at 2007 Highs

Trent Grinkmeyer in front of stock market with bull background

Trent Grinkmeyer
October 3, 2023

Lending cost headed higher

Bonds are not the exciting, high flying thrill ride that equities have been. Yet the bond market is larger than the equity market. They are the source of liquidity for company’s and nation states such as the United States. Since the USA is the reserve currency of the world, US Treasury’s are a major player when liquidity is need by countries. They simply take their Treasury’s to the Federal Reserve and exchange them for US Dollars. We saw a steady increase from 2010 to 2019 then saw a spike in in 2020 due to the pandemic which increased the Feds Balance sheet.

Since April of 2022 the Federal Reserve has been raising Fed Funds Rates and selling off their balance sheet.

Today the US 10 YR broke above 2007 levels as of this post sits at 4.74%. We should expect to see levels of 5% or higher this month due to the selling of US Treasury’s. My theory to why this is happening is due to the cost of energy and food products. If you have to feed a nation, you sell assets to be able to buy those products that serve your country.

The problem we are seeing from the effect of the selling of Treasury’s is on the lending market. Mortgage rates, commercial loans and personal loan are headed higher because they are benchmarked off the US Treasury market, in particular the US 10 YR. This will then translate into slowing of the housing market, car loan market and corporate barrowing. The real GOTCHA is the refinancing of debt that was financed in 2020 at low rates to today and beyond. The US is expected to have to refi $5 trillion and the commercial real estate market is set to refi $1.5 trillion in the next twelve months. This is at 3 to 6 times the rate they originally financed it at.

It goes without saying that we should expect a continuation of bankruptcy filing over and above the 402 company’s YTD as of July 2023. For those who subscribe, you see my intermediate term Ideas on what to own and what not to own in my weekly Sector ETF Allocator. Today is about keeping what you got. Not buying to ride a rocket to the moon.

Volatility is Lurking

VIX continues to set up for a breakout towards 20. This will put downside pressure on the SP500 as well as other equity index’s.

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