As we have been calling for since the end of last year, there is indeed regime change in the markets. Our point was that the framework of the interest rate deck has changed. The next several years will be different because of this.
What it means obviously is yet to be determined. But what really strikes me when I look at this chart below is this:
The beginning of this enviornment was when we were reeling from the crisis. Frankly, at the time most of the market participants thought we were still deeply IN it. That is when Mohammed El Erian coined the term "New Normal". It was my opinion that term was really a pejorative for "cant really grow anymore". Well, what this seems to me is that if we break that 3.06 means we are officially exiting the "New Normal". But into what??
Clearly the 3.06 number on the US 10 year is a watershed level. The long term downtrend of ever lower interest rates is indeed behind us. This does NOT mean, however that we see far higher rates, at least yet.
This certainly has implications to proper Asset Allocation. that will indeed change. We now see short term fixed income yields that are interesting. At least we think so.
I am not convinced that a 3-3.5% 10 year is bad for the economy or for stocks for that matter. We are likely to see GDP in that range and that is what provides some comfort. As our Chief Economist, Ben Emons has been saying, financial conditions are indeed tightening. So, that must be watched. If, however we see rates move significantly higher - WITHOUT A COMMENSURATE ACCELERATION IN GROWTH, then it would be a real concern.
Recall that in every past cycle we had both interest rates much higher as well as growth. It is the delta between that two that is the thing that we are most focused upon...and that is likely to be determined by the FED's own actions....
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