US Treasury Bonds Have Crashed -- Is It Over? TINA is Dead.

Adolf Goebbels
Published on Oct 23, 2023
Producer Price Index came out a little hotter than expected on Wednesday, with core PPI at 2.7% year-over-year inflation versus only 2.3% expected. Consumer Price Index came out roughly in line with 3.7% year-over-year rate versus 3.6% expected. This combination created some caution for treasury investors and caused the Thursday treasury auction to be one of the worst in history, with further increases on the 30-year treasury yield.

The Fed has been decreasing its balance sheet, which has helped spike interest rates. The 30-year treasury yield has moved from 1.9% to 4.8% in just under 2 years. However, this 4.8% is still below the historical average as QE artificially depressed yields during the period from 2008-2022. The historical average for the 30-year treasury yield has been 7.65%. The Fed went from an $800 Billion balance sheet in 2008 to $8.9 Trillion in 2022, now $8 Trillion.

As interest rates have shot up, bond values have collapsed 30.5%, compared to the S&P500 which has fallen only 8.7% over the same time frame. Both of them bottomed about the same time in October 2022 and recovered together until February of 2023; however, they began to diverge at that time with stocks continuing to rally and bonds making another leg down.

Bills, bonds and notes are now a reasonable alternative to stocks as they approach or break 5% yield. TINA, or “there is no alternative" to stocks, is dead. Typically when interest rates spike stocks go down, but this has not happened over the past 8 months. Now that the Fed has stopped being the top buyer of treasuries, we think interest rates are likely to move higher still to around nominal GDP (around 6%). Long-term interest rates dictate P/Es. Stocks, in our opinion, are vulnerable, especially if interest rates continue higher.

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