A Rising Rates Cycle

A Rising Rates Cycle

The down trend line adjoining 1988 top has been broken out indicating big reversal in falling rate cycle. Since hitting an all-time of 15.84 percent in September 1981, the yield on the U.S. 10-year has been steadily declining. The US 10 year Treasury bond yield formed bottom at 1.3180 in July 06, 2016 and touched high of 2.9424 on February 15, 2018. The yield price almost doubled in last 1 ½ years, entering in a phase not seen in 72 years.

Historical analysis suggest that Interest rate cycles are longer, typically stretching 22 to 37 years. This new rate cycle could last at least two decades, introducing a whole new class of investors to rising rates. This meant a lot for all as rise in interest rate would directly or indirectly raise the cost of goods and services. This is might be the first sign of rising inflation on global front which will lead to change in sentiment/ behavior of global financial market. The people likely to reduce exposure in equity market and will move towards bond as real interest rates would be higher.

Hope Still Alive

The correlation between S&P 500 and US 10 year yield remains positive below 4% while concern rises once the yield starts moving above 4.50%. As bond market discounts four rate hikes for 2018, some experts believe the recent development would lead to end of bull market in equity market. With rising interest rate and unwinding of easy liquidities would impact emerging market (EM) equities. The foreign fund likely to move from EM to DM, as real interest would rise along with growth in economy attracts better valuation for their equity as well.