All Eyes on the US Government Ten-Year Bond Yield
There are many factors which have driven the US Government Ten-Year Bond Yield down over the 35-year period from 15.85 per cent in the September Quarter of 1981 to 1.35 per cent in the September Quarter of 2016. While I will discuss these factors in more detail in an upcoming blog, what has struck me is that over recent weeks we have seen the US Government Ten-Year Bond Yield jump by nearly 0.5 per cent from close to a record low of 1.45 per cent to the current 1.93 per cent.
Combined with the Federal Reserve cutting the US cash rate three times in the past few months by 0.25 per cent each, to the current range of 1.50 per cent to 1.75 per cent, the risks associated with an inverted yield curve – where the longer term interest rates are lower than the shorter-term interest rates – seem to have subsided.
Is this increase in the US Government Ten-Year Bonds in anticipation of a trade deal being struck between the US and China? Or, is it in anticipation the US Industrial Production data will see an improvement in calendar 2020? Or, is it a combination of both?
One thing is observable; and that is any perceived improvement in economic data generally encourages the market to rotate towards companies with more economic-sensitive (or cyclical) attributes. This rotation in the US is visible in the very recent out-performance of “Value relative to Growth”, Small relative to Large, and Emerging Markets relative to the US.
Our friends at Credit Suisse have provided the Factor Relative Performance since 3 October 2019, and I have included some of those major attributes below:
|Low PE Companies||+7.2%|
|Small Market Capitalisation Companies||+2.7%|
|MSCI World Net Total Return Index in A$||+4.8%|
Predicting the duration of any rotation is difficult, particularly in the context where US Government Ten-Year Bonds have been in a bull market for 38 years, notwithstanding several relatively short-term reversals.
Nevertheless, for long-term global investors in the equity market, I strongly believe the best course of action is to follow the lead from our partners at Montaka Global Investments, and simply focus on individual companies which:
- Own a high-quality business which is difficult to replicate;
- Is in an attractive industry, with structural tailwinds; and
- Is undervalued.