MBS Live Week Ahead: 10yr at 3%: The Most Overrated--Possibly Even Meaningless--Ceiling

I'm going to be surly this week about the way the bond market is covered in the financial media.  Many of the articles to which I take exception will appear in the live news stream on MBS Live and Mortgage News Daily.  They are there for reference and/or "target practice," if you take my meaning.  And I'm not talking about plinking cans in the 3rd grade at my buddy Tim's house (he had dirt bikes too!).  I'm talking more like a heavy explosives demonstration.  So please, stay behind the safety glass, put on your protective eyewear, and observe.

Target 1: The Notion That High Rates Hurt Stocks:

No matter how many times someone writes this in a news article--no matter how many times a talking head claims this on the TV--it never becomes true.  I mean, I guess it could become true at some point, but that point surely isn't 3%.  This is easy enough to demonstrate given past precedent that shows stocks frankly not giving a damn about 3% or about rapid spikes thereto. 

Everyone who comments on markets like to be able to explain whatever they see with tangible cause and effect.  It feels more believable.  Even for myself personally, I'm less wary about putting analysis in front of you when clear culprits can be blamed for whatever movement we're seeing.  A perennial trick of the lazy analyst (or the analyst who didn't luck into a better answer--we've all been there) is to simply pick another major development in markets, politics, etc., and foist a connection.  I think you get the point, but to be clear, if stocks were moving higher with 10yr yields MUCH higher than 3% in the past, and if 2013's significantly more abrupt spike to 3% did nothing to cool the stock rally, the current move to 3% is small potatoes. 

Target 2: The Notion That 3% is a Huge Psychological Barrier

I have mixed feelings about this one.  3% has been a huge barrier in the recent past--no question.  It could also represent an important short-term technical level this time around, but this old gray mare ain't what she used to be.  Every sane and intelligent Treasury analyst's base case for a bearish move in 2018 includes a break well above 3%.  3% was a 2013/2014 number.  Back then, we hadn't yet begun to hike rates.  Inflation was lower.  QE bond buying was full-fledged, and EU QE was on the horizon.  Now the Fed has hiked repeatedly (and will continue to hike), QE's desuetude is apparent, and there actually could be a bit of inflation.  Perhaps most importantly, Treasury issuance is unavoidably moving higher.  It's for reasons like these that my own base case for a bearish move in 2018 centers on a rate more like 3.25% at minimum.    It's the same for most Treasury analysts who spend even more time and energy thinking and writing about these things than I do.