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Why rates could stay low for awhile

Talking Numbers

Why rates could stay low for a while

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The Nasdaq's creeping bear market

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The Nasdaq's creeping bear market

Stocks are around their record highs, earnings are solid, and the economy is chugging along. But why aren’t interest rates moving higher?

Despite things being at the very least not terrible, and with the Federal Reserve winding down its bond-buying monetary stimulus, the benchmark U.S. Treasury 10-yearyield is hovering around the 2.5 percent mark.

Bond yields move in the opposite direction of bond prices. With fewer bonds being bought by the Fed every month, it was expected yields would be higher than where they are today.

According to Steve Cortes, founder of Veracruz TJM, said Fed quantitative easing (“QE”) policy remains part of the reason rates are staying where they are.

“The Fed’s QE has simply provided a floor underneath the bond market even though a lot of people think there shouldn’t be one,” Cortes said. “The other point is that too many people disbelieve in the bond market. So just as stocks can climb a ‘wall of worry’, I think the same phenomenon has occurred in the bond market because it’s been over-shorted, particularly by levered money that has actually paradoxically kept the market elevated.”

(Read: Treasurys slide on unexpectedly low US jobless claims)

However, after being bullish on bonds for much of the year, Cortes said he has now changed his opinion and is short the U.S. 10-year note because he expects higher inflation.

“We’re finally seeing some inflationary pressure out there,” Cortes said. “If you look at industrial metals, if you look at the performance of inflation-protected securities, [they are] doing very well rallying. [That] tells us that spread markets within the bond market are starting to finally fear inflation. We had no inflation basically for the last five years. I think there’s finally an uptick in inflation. To me, that tells me rates are going to go higher from here.”

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Ari Wald, head of technical strategy at Oppenheimer & Co., said the charts agree with Cortes. In the near term, Wald believes the 10-year yield will remain in a range between 2.4 and 2.7 percent. Given that is below its downward-sloping 200-day moving average, the trend would suggest bond yields would continue to head lower,  Wald said. Nonetheless, he doesn’t believe that will happen..

(Read: US economy looks better, so why do we worry?)

“We just don’t think there’s enough bond bulls left to sustain that breakdown,” Wald said. The reason he gives is that bullish sentiment for bonds is at 64 percent, according to a recent survey by Consensus, Inc.

Yet sentiment is not as bullish as it was in 2012, when rates were at their all-time lows. But should it, bond yield may snap back up.

If we get that breakdown and sediment reaches an extreme,” Wald said, “then I think we can get that backup that Steve was talking about.”

To see the full discussion on the U.S. 10-year note, with Cortes on the fundamentals and Wald on the technicals, watch the above video.

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