Are US Yields Resuming their Decline?

July 5, 2021 at 10:00 PM

After the Consumer Price Index (CPI) jumped above 5%, multiple signals that inflation is running hot (lumber, copper, oil, and other commodities), the housing market entering a bubble, and stocks soaring to new all-time highs have finally pushed the Federal Reserve (Fed) to think and most importantly do something about tightening monetary policy. 

According to its announcement, the Fed is intending to start tapering Quantitative Easing (QE) in late 2021/early 2022 while also potentially raising rates late in 2022/ early 2023. However, no one can tell if it’s really happening any time soon. But the message was clear – investors should not expect the current monetary policy to last forever.  

Bond traders took it really seriously – bond prices rose quickly, sending yields sharply lower, suggesting the market now believes the Fed will tighten monetary policy and inflation will return to 2% soon. 

Looking at the long-term chart for yields on the 30-year US Treasury and it is clear that they failed to break their 35+ year downtrend. If the downtrend persists, it might be another bullish signal for US stocks as equities generally rise when yields fall.

Considering both the SP500 and Nasdaq 100 indices remain in their long-term uptrend channels, we could see a quick 10-15% summer rally toward their upper channel lines. Additionally, the USD remains weak, and it looks like it won’t maintain the bullish momentum it started after the Federal Open Market Committee (FOMC) decision. 

Despite the Fed being hawkish, it appears the long-term trends in the financial markets will remain intact, meaning stocks are expected to go up, bond yields down, and the USD sideways or lower.

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