10 Year Yields Are Up and Readers Digest

In case you have not noticed 10 year yields have gone up over the last month or so. It is probably the hottest subject on the investing net right now.

Here is a chart of the US 10 year note over the last year:

However, it does not look like a big deal when viewed over the last 5 years:

The Japanese 10 year is also acting spastically:

The Canadian 10 year is also up a lot (from Bank of Canada):

In nominal terms the moves in 10 year yields are not that large as can be seen in the charting. In raw percentage terms the moves are substantial. The Canadian move is about 25% is percentage terms. Pretty big move considering it is only 1 month. The reason is clear. The FED will be easing off the gas pedal soon and the market is front running this information. Higher interest rates will probably an effect on the real estate market although other sectors are vulnerable as well (such as the consumer).

For me the more important question is how far can this bond move go and what impact will it have on the stock market? The worst bond move I have ever seen coming out of a recession is the 1994 "correction". Bond yields went from about 5.5% to 8% over the course of 10 months. Here is a chart from FRED:

How did the stock market do over the same period (1994):

The S&P 500 was basically flat for the year which is how I remember it. A significant rise in interest rates can certainly have an adverse effect on the economy but I am not going out and selling any stocks. Usually the only time I sell is if I find something good to buy and I need the money or if I think a recession is coming.

Speaking of recessions the Federal Reserve of Cleveland has a great web-site for following recession type indicators:

Cleveland Federal Reserve - Financial Stress index

Basically the stress index is a composite measure of yield spreads. Right now they are indicating virtually no risk of recession. I check into this site about once a month.

Another web-site I visit about once a month is the Philadelphia Fed where I find the Aruoba-Diebold-Scotti Business Conditions Index.

Philadelphia Fed - ADS Index

The ADS index bounces around quite a bit and is more focused on economic indicators. Right now it is neutral.

Of course the main Leading Indicators are published by the Conference Board but they are copyright protected. Also the ECRI (among many others) has a weekly leading index which is free to view.

Some interesting reads over the weekend:

Bob McTeer on Bank Reserves

Calafia Beach Pundit on Corporate Profits (Marty says be careful when investing based on long term charting). Good blog.

Jason Zweig at the WSJ (Scary stuff. Do not buy on margin and use limit orders!)

Sober Look - Emerging Market Review and etc. (good site in my opinion).

John Mauldin on Japan (this is a good one on Japan by Mauldin)

Bonddad on Weekly Economic Indicators (Bondad is a good site but be careful - don't get lost in the forest).

Wells Fargo on Canadian Economy

Wells Fargo - US Capital Flows and the Dollar

Learn Bonds - Good Overview of US Bond Market