US Treasury Market
Date	1 mo	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
12/19/19	1.54	1.57	1.57	1.52	1.62	1.65	1.73	1.84	1.92	2.21	2.35
12/20/19	1.57	1.58	1.58	1.52	1.63	1.67	1.73	1.84	1.92	2.21	2.34
12/23/19	1.57	1.59	1.60	1.53	1.64	1.67	1.75	1.86	1.93	2.22	2.35
12/24/19	1.55	1.58	1.61	1.53	1.62	1.64	1.72	1.83	1.90	2.20	2.33
12/26/19	1.59	1.58	1.61	1.53	1.64	1.65	1.72	1.85	1.90	2.19	2.33

                                                                                                                                                  Source: U.S. Department of the Treasury, as of 12/26/2019

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                                     What a Difference a Year Makes!
                                  
Christmas Eve of 2018 saw rates heading higher and stocks in a steep and scary nosedive. The Fed had just raised interest rates at their December meeting and financial markets were not happy.  The graph below may help explain why the markets were protesting the Fed’s last hike. Notice how the year over year percentage gain of S&P 500 corporate earnings peaked in April of 2018.  Note the rapid deceleration of corporate earnings that ensued as the 5yr Treasury Yields started their move up over 50 bps to over 3% highs seen in Nov.  The question on everyone’s mind was “What was the Fed thinking?”

As you can see as corporate earnings have continued to decelerate at a more rapid rate throughout 2019, 5yr Treasury yields dropped over 150 bps. The two green circles on the graph demonstrate two of the largest divergences between the rate of corporate earnings gain or loss and 5yr Treasury yields.  S&P earnings YOY are now showing a -.9% growth rate while yields are up 30 bps from the lows. Is this picture telling us one reason why the Fed has started expanding their balance sheet again (non-QE, QE)?

Stay tuned, if corporate earnings do not start to accelerate, putting upward pressure on rates, then now may be a good time to take advantage of these divergences and add some higher yields to portfolios.



Source: Bloomberg L.P.



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