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Member FINRA/SIPCPage 1 of 2
Jeffrey Kleintop, CFA
Chief Market StrategistLPL Financial
v4
LPL FINANCIAL RESEARCH
Weekly Market Commentary
Government bond yields have moved sharply higher in 2009—althoughthey remain at historically low levels. After reaching a low of 2.05% onDecember 30, 2008 the yield on the 10-year Treasury note climbed to a highof 3.74% last week, reversing the decline in yields that took place during thefourth quarter. The price of the 10-year T-note, which moves in the oppositedirection of the yield, has plunged, resulting in about a 25% loss over thesame period. Late last year, we recommended avoiding Treasuries and wroteabout a developing bubble in them as investors sought safe haven fromthe financial crisis. Now that the direction of government interest rates hasclearly turned around, what does the rise in Treasury yields mean for theeconomy and markets?The healing process underway in the United States is driven in part by lowinterest rates that contribute to low mortgage rates, low cost of capitalfor businesses, and the low cost of government debt used to financestimulative policy actions. Fortunately, mortgage rates and corporate bondyields have not risen significantly; credit spreads have contracted, allowingthese important rates to remain largely unchanged. In fact, Baa-ratedcorporate bond yields are about that same as they were on December 30,2008 when Treasury yields were at their low, and the average rate on aconventional 30-year fixed rate mortgage remains at about 5%.Rising interest rates are common near the end of recessions, as in facthappened with each of the past five recessions. As you can see in Chart 1,the magnitude of the rate bounce is often related to the length and severityof the recession. The largest rise was in 1983 following the back-to-backrecessions and inflation spiral of the late 1970s and early 1980s. The risein rates is usually a sign that markets are beginning to broadly expect therecession is coming to an end and a return to growth is on the way.The bounce in yields this year has been bigger than average. However,given the severity of the recession and the fact that rates fell to just 2%, thesharp rise is not surprising. Based on the path of prior yield bounces, whenafter 90 trading days, the yield bounce has typically peaked, the currentepisode may have now run its course. Chart 2 shows the current bounce inyield on the 10-year T-note since the low on December 30, 2008 relative tothe average bounce of the prior five recessions. In the past 20 trading days,the yield has broken away from the average to total a rise of about 170 basispoints since the low, compared to the average of about 100 bps bythis point.
June 1, 2009
As Rates Spring Back, Is a Weak Summerfor Stocks Ahead?
Highlights
Government bond yields have moved sharplyhigher in 2009. Such a rise in rates during recoveryfrom recession is usually a sign that marketsare beginning to broadly expect the recession iscoming to an end and a return to growth is onthe way.However, the healing process underway in theUnited States is partly dependent upon lowinterest rates that contribute to low mortgagerates, low cost of capital for businesses, and thelow cost of government debt used to financestimulative policy actions.While the rise in Treasury yields is a normal andhealthy part of the healing process in the economyand markets, a further rise in the 10-year T-noteyield over 4% this summer may act as anegative factor.
 
 
1
The Yield on the 10-Year Treasury Note with Endof Recession Rate Bounces Noted
Source: LPL Financial, Bloomberg,National Bureau of Economic Research
 
181614121086420
         1         9         6         2         1         9         6         6         1         9         7         0         1         9         7         4         1         9         7         8         1         9         8         2         1         9         8         6         1         9         9         0         1         9         9         4         1         9         9         8         2         0         0         2         2         0         0         6
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