What's Next for Rates?

09/27/2013 12:00 pm EST

Focus: BONDS

Jim Jubak

Founder and Editor, JubakPicks.com

There's been dramatic change in yield of 10-year T-Note since start of September, with looming political impasse MoneyShow's Jim Jubak tells where rates are headed.

You remember way back in early September when yields on 10-year US treasuries broke briefly, like inter day, above 3%, 3.05 or so was the high for that day, and the talk was, including here, that we're headed to somewhere over 3. Well, you talk about reversals. On September 24, the 10-year treasury closed at 2.62, a huge move for the treasury market, and clearly one of the things to look at right now is, okay, when we're at 3.05 at the beginning of September, we were going, "Okay, where's the top, where's the top, where's the top?" and thinking that maybe it was 3.25. The Fed's decision not to taper put an end to that thought, and that's why we're back down at 2.6 and change.

Now the issue is, where's the bottom of yields, which means, remember yields go down as treasury pricing go up, so we're seeing a rally in the value of treasuries, that's what driving the yields down, so the question is, "Where's the bottom here?" I mean, we're still above where we were a year ago but a year ago we were at 1.67. I don't think we're going to get down to there. A month ago we were at 2.82, so we're well-below that level, so where's the bottom?

What we've got here is the likelihood, I think, that the market will go down a little further as it becomes clearer and clearer that if there's going to be a government shut down, it's not going to be for very long and that the basic solution to the political impasse in the House of Representatives is something that basically says, "Okay, vote for this and we'll keep the government running," because politically, that's too dangerous for Republicans to contemplate a shut down, but we're going to put off the battle until the debt ceiling comes up around the 17th or 18th, when the US runs out of room to keep paying its debt or to put off more debt.

So, right now, it looks like we might go down a little further in yield, 2.5, 2.4 is possible, but then you've got to wonder, okay, so we get to the debt battle, which would seem to drive yields back up as treasury prices go down, because they're riskier, and then we look at the possibility of a taper, not in October, but more like December, and does the market start to worry about that? So, really, if you're in the treasury market, your, sort of, risk/reward ratio has really switched. At the beginning of September, you could say, "Well, they're at 3.05 and maybe the top is 3.25, so buying treasuries here, I'll catch the rally in treasuries." Now you've got to say, "Well, the rally in treasuries has happened, maybe there's another 20 basis points down here," but after that, it looks like treasury prices go down, yields go up through the end of the year.

Very, very important shift in dynamic, and I don't know whether this is actually going to happen. It looks like what is most likely to happen, but certainly it's a big change for the equity markets, and everything else that is linked in one way or another to treasury yields, so basically at this point watch the 10-year. You're trying to find where the turn is, whether it's here at 2.6 and something, or whether it's somewhere around 2.4, but this will make a big turn in the overall financial picture around the world.

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

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