Date: February 16, 2021

Now It’s About Rates

The yield on long-dated treasuries is set to jump this morning and the pundits are all over this. You can see in the chart below that the 10-Year Treasury Note has gone from almost 2% a year ago to 0.40% at the height of the Corona Crash in March to almost 1.30% today. That is hardly a surge in long-term interest rates and a gross exaggeration that equity investors are going to eschew stocks for bonds. But yet, we have all kinds of worry in pundit land.

When long-term rates go up, pundits like to rationalize it as either for the right or wrong reason. The “right” reason is that the economy is surging. The “wrong” reason is that inflation is rising. Well folks, there aren’t many times when the economy is surging and inflation isn’t rising. Today, we presumably have both.

In my 2021 Fearless Forecast, I predicted that 10 year yields would see the area by the two horizontal blue lines between 1.30% and 1.40%. Given the collapse seen last year, my forecast is hardly bold nor brave. It is a reasonable bounce from what was all-time lows yields during the height of a global pandemic.

In my view, rates would have to rise a whole lot more for it to become a lasting issue for equities. With stocks having gone parabolic since October 30, I am sure rising rates would provide the necessary cover for another pullback in the stock market. However, I want to remain crystal clear. While we have epic greed and euphoria, a market decline on the rate rise is not something that would end this still young bull market. The stock market’s foundation needs to weaken significantly without prices going down. Until proven otherwise, any and all weakness is a buying opportunity.


Paul Schatz, President, Heritage Capital