I like to “visualize” what may happen in the future so that I can be better prepared to respond if a similar situation occur in the future. Some call it “forecasting”, or “speculation”, but I like to call it visualizing. Please take my words with a great dose of salt!
Will US Treasuries 10Y yield rise above 3%?
Everyone is looking at the US Treasuries 10Y yield. It is believed by many that if it rises beyond 3%, equities (especially US equities) are unsustainable.
At the time of writing, it is standing 2.902%. Looking at the chart, it looks to me that 3% barrier will be broken in 2018.
How will the bonds respond to the breaking of 3%?
There will be likely be a knee-jerk reaction of selling off of both stocks, and bonds.
- Perpetual bonds with no reset will be greatly impacted
- Perpetual bonds with call dates longer than 5 years will also be impacted
How will the Reits respond to the breaking of 3%?
I suspect most investors do not realize that :
- SReits have locked-in on average 78% of their financing at fixed rates
- Average debt maturity of SReits is 3.7 years
- average debt gearing is 36.6% on average
- higher interest rates usually means higher occupancy and higher rents
Traditionally, people continue to think that rising interest rates to impact Reits, Hence Reits should come fall because of market sentiment. It is better to take some profits off the table before the selloff.
Will US Treasuries 10Y yield keeping rising beyond 3%? When will it stop rising?
The Fed Fund rate and US inflation numbers will directly impact the 10Y yield.
- The Fed probably wants to increase rates so that they can have more buffer for bullets when things go sour in future. Now at 1.5%, by the end of the year, it is expected to be 2.25% to 2.5%.
- Current inflation is at 2.1 ( https://tradingeconomics.com/united-states/inflation-cpi) and projections for the next 5 years is not more than 2.65 ( see https://www.statista.com/statistics/244983/projected-inflation-rate-in-the-united-states/). Inflation is not likely to rise dramatically in the near future.
I suspect the 10Y yield to hit a high of somewhere about 3.5% in the next 1 year. The US economy is really unsustainable when the rates stay high.
Hence, in the coming knee-jerk selloff, it may be the best time to buy bonds. Bonds may even continue its supercycle. What about stocks? Likely it will be under great pressure.
The above is a 20 year chart of US Treasuries 10Y chart. The red arrows are my visualization that 3.5% may be the current ceiling. Do note that no one can predict the future. These visualizations are for myself as I am a visual person and I find it easier to prepare myself when visualizing.
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