The 10 Year Treasury Rises & Equities Falter, Why?


By Ross Silver, CEO of SylvaCap Media

Investopedia has an excellent article that discusses what happens in an environment where rates go up. It seems that all we see from the media is panic and quotes such as “What’s happening with interest rates?” “Where’s the prime headed?” “Is the Fed announcing a rate hike next month?”

Interest rates, the cost someone pays for the use of someone else’s money, tend to obsess the investment community and the financial media – and with good reason. When the Federal Open Market Committee (FOMC) sets the target for the federal funds rate at which banks borrow from and lend to each other, it has a ripple effect across the entire U.S. economy, not to mention the U.S. stock market. And, while it usually takes at least 12 months for any increase or decrease in interest rates to be felt in a widespread economic way, the market’s response to a change (or the news of a change) is often more immediate.

Understanding the relationship between interest rates and the stock markets can help investors understand how changes might affect their lives, and how to make better investment decisions. So let’s try to understand. First and foremost, a 3% 10 Year Treasury yield is insanely low historically not to mention the fact that the rate has crossed over the 3-percent mark in the past 5 years. Twice in 2013, the yield on the 10-year Treasury reached 3%, danced around the 3% mark without crossing over and quickly fell back under that level.

The market often rallies with rising rates but why not now? In the past decade, the 10 year rate has peaked past 3% or 4% — once during the 2009 financial crisis and once in 2010 during the recovery. During those periods, all three major indices rose more than 30 percent. We think the market is set up for another bullish run and really couldn’t be any more bullish on equities considering the health of the economy and how strong Q1 corporate earnings have been. Let’s see if we turn out to be right!

Derby Time

My favorite time of year in horse racing is here, time for the annual Run for the Roses aka The Kentucky Derby. This year there seems to be a number of accomplished horses entering the starting gate in Louisville however one in particular has friends of mine who are professional horse players gushing. The horse that has the West Coast clockers drooling is Justify, a lightly raced and undefeated beauty who moves like poetry in motion and may be the most talented horse I have ever seen run. I did not forget about Triple Crown winner American Pharaoh, and champions like Zenyatta, Cigar, and Arrogate when I made the statement I just made, believe me I thought long and hard heaping such praise on a horse who has only won 3 races and for the most part is unproven and unworthy of being considered a champion, yet. With that said, I have never seen a horse move the way Justify does, he does so with ease, grace and boy is he fast. With some racing luck (pretty please), Justify should win the Derby and probably do so with relative ease if he is as good as I think he is, I cannot wait! Horses I will be using underneath Justify are Good Magic, Audible, Magnum Moon, Free Drop Billy and Hofburg (another future star). The only horse I fear is Mendelssohn, a horse owned by the largest bookies in the world and if that horse gets bet heavy in the Derby, by bet heavy I mean he is at the starting gate with odds of 2-1 or less, than Mendelssohn may be better than Justify and the smart bet. I doubt that will happen given great bookies don’t lose. Good luck to all the horses running and may they all come home safely!

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