Market Beat: Getting ahead of the yield curve
The yield curve is a way of looking at interest rates for bonds with the same credit rating but differing maturities. Typically, we’ll look at the interest rates of various maturities for U.S. Treasury bonds.
Normally, the yield curve slopes upward and longer-term bonds pay a higher rate of interest than shorter term issues. Sometimes, the yield curve can invert and that frequently occurs prior to an economic downturn.
The Federal Open Market Committee has indicated that they might be done raising interest rates for the time being and currently the yield curve is fairly flat. As of today, April 22, the two-year U.S. Treasury bond is yielding 2.38%, the 10-year bond is at 2.67% and the long-term 30-year U.S. Treasury bond has a yield of 2.98%, so there is not much difference between the short term and the long-term yields at this time.
The Fed has also been reducing the size of its balance sheet. In order to stimulate the economy, when interest rates were at historically low levels, they expanded the money supply and their balance sheet, by using a process known as QE or quantitative easing. QE consists of purchasing government bonds. Recently, they have been doing some quantitative tightening, by selling off some of those bonds and reducing their holdings.
Corporate earnings reporting season is underway, and earnings growth is forecast to slow down this quarter from the double-digit year over year earnings growth that we’ve seen over the last couple of years. To date about 15% of S&P 500 companies have reported. Earnings growth is predicted to decline by about 4.0% this quarter.
The stock market is valued higher than average right now. The forward PE or price to earnings ratio is at 16.8, which is above both the five year and the ten-year averages.
GDP or gross domestic product growth will probably come in about 2.0% or more for the first quarter and that is good news, but approximately 50% of the growth could come from the falling trade deficit and inventory buildup. The trade deficit has been falling primarily due to weaker imports. Unleaded gasoline prices have also been rising mainly due to tighter supply rather than greater demand and that could have a negative impact on non-energy sectors of the economy next quarter.
There are some signs that economic growth is slowing and that interest rates may not increase much this year.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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