Keep Your Eye on Rates

For the week ahead, MoneyShow's Jim Jubak suggests you keep an eye on one key measure of interest rates to see if an important level is overcome.

For the week ahead, I think you ought to watch yield on the 10-year US treasury. It's been creeping higher, but people aren't really paying much attention to it. It's higher because of Syria, or problems in emerging markets, or general turmoil, but what we're looking at is the yield closing in at 3%, and I think what happens at 3% is everybody goes "Oh, my God!" and they finally notice, and I think that makes 3% kind of an important benchmark, at least in terms of market sentiment.

I don't think it's actually very important in the real world, whatever that is, but I think it's going to create a fair amount of turmoil, because people suddenly start to pay attention to it, it's going to seem important, and you're going to wind up with a lot of stories and commentary from Wall Street, et cetera, talking about, "Well, now that we're 3%, where do we go from here?"

Right now the yield on the 10-year treasury is somewhere around 2.89, a year ago it was a whole 100 basis points lower. A month ago it was at 2.6, so you're seeing a pretty decent move up, in even, the last month, so there's clearly momentum for this, and the driver on this is worry about the fed starting to taper off its buying of treasuries and mortgage backed securities, somewhere around its meeting on September 18. That's why you're seeing yields rise and that's why I think you've got a good chance of seeing them get to 3%.

When that happens, I think you're going to get a massive overreaction, panic in the bond market because bond prices go down as yields go up, so people who have already taken big losses are likely to pull money out, or you're going to see selling. You're going to see more turmoil in emerging markets because with a 3% yield, the 10-year US treasury starts to look really, really good in comparison to the bonds of other countries and other assets. I think this will take a bite out of the US stock market. All these things suggest that 3% is going to be a major market event. If it is, and because it is more a market event because of sentiment, I think you might get a decent trade. So if you get to 3% and the market panics for a few weeks, there might be a temporary bottom that you can then trade, buy stuff when it's low, and then trade off when it gets to December, or so.

That's how I would play this. I don't think 3% is going to last for very long, I think it will go down again, because the reason for a 3% yield, fundamentally, long term, is the US economy doing better than expected. I don't think we're going to see growth strong enough to keep the yields at 3%. It's likely to be a short term top, so I'd use it as a trading opportunity.

This is Jim Jubak for the MoneyShow.com video network.