Volatile Interest Rate Moves Underscore the Inflation vs. Deflation Debate

ratesDavid Fabian: It’s been a while since I addressed the topics of interest rates, tapering, and the impact of these concepts on our investment portfolios.  Last week’s better than expected jobs report significantly lifted both intermediate and long-term interest rates which gave us a flash back to 2013 as the markets digested the news.  Ultimately the increase in jobs is seen as a positive sign the economy is on track and underscores the Fed’s intent to taper their monthly asset purchase programs by $10 billion per month until the stimulus is completely removed.


Last year the combination of surging stock prices and better than expected economic data led to a sharply rising interest rate environment.  Investors rotated away from bonds and into equities at a rapid clip to adjust to an environment that favored higher risk assets.  This pushed the 10-Year Treasury Note Yield to a high of 3.00% and catapulted stocks to new all-time levels.



However, that story has reversed in 2014.  The bond market this year has been fortified in part due to the combination of equity volatility and an over extension of yields.  Inflationary statistics have not matched the rising rates story and many portfolios that were underweight bonds are now adding them back to the mix as a hedge against slowing equity momentum.  Stocks have continued their upward march; however successive highs appear to be perceptibly slowing.


The iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) is at an important technical cross road that will be a big tell on the future direction of both fixed-income and equities.  This measure of long-term treasury bonds has strengthened significantly since the beginning of the year and is now at a critical juncture of price support.



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