10 Year Treasury Yields Hit Decade Level Highs While Stocks Tank!

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Market News and Short-Term Predictions

During the meeting on 9/20/23, Federal Reserve Chair Jerome Powell indicated that the US economy still faces potential risks, and a recession remains a possibility.

The Federal Reserve decided to maintain the current interest rates, with the Target Federal Funds Rate Upper Limit at 5.50%. Powell suggested that one more rate hike might occur this year to bring inflation down to the target of 2%.

Currently, inflation is above the target, with a rise of 4.3% in August. The impact of the Federal Reserve's tightening measures is still unfolding. Factors such as increasing energy prices and positive economic activity data influence the Fed's outlook. However, potential disruptions from strikes, the government shutdown, and student loan repayments could impact future decisions.

In the wake of the Fed’s hawkish pause, US 10-year Treasury yields have risen back above that of global equity yields.

I have been saying the Fed keeping rates higher for longer is not necessarily priced into this market. Higher rates can put a damper on economic activity and slow down spending. I mean I am seeing articles discussing the possibility of 8% mortgage rates! At some point, the higher cost of debt will ripple through the economy. May not be a crash, but it should lessen demand. Which in turn lowers inflation, which is exactly what the fed wants!

The good news is buying bonds now can yield a decent percentage. We are seeing rates not seen since the early 2000s. I personally think bonds are looking more attractive here as expectations are now being set for higher rates for longer. Now if that expectation changes in 2024, bonds would rally on hints of lower rates.

So I'll be looking at adding some more bonds to the portfolio this week!

Also as a fun sidenote, remember when I talked about IPOs sometimes being hot to start off and then drifting lower? Just look at this ARM graph :)

Lessons to Be Learned

Let's talk about bonds a little more for those who don't know why higher rates would be bad for bondholders and lower rates would be good for bondholders.

Here is an example:

Suppose I get a $1000 bond that pays a 5% coupon rate, and the day after I get that bond the government starts offering the same bond, except with a 10% coupon rate. And suppose I wanted to sell my bond. Someone in the market for a bond could either buy my bond that pays 5%, or a new one that pays 10%.

So if I wanted to sell my bond, I'd have to sell it at a discount.

Works the other way around too.

Now you know why so many people care about the federal funds rate as that will have an impact on bond yields and therefore will impact those who are holding onto debt instruments as investments.

Portfolio Update

Stock/Option Watchlist

Stocks: TSLA, LLY, CHDN, ROK, ADSK, SBUX

Options: SPLG, PLTR, BAC, F, AAL, T, DISH

See premium membership for details on interested entry points/strike prices/current wheel positions.

Options Trading Portfolio

Closing Trades

I had a few winning trades that closed last week. The first was in PLTR in which I bought back the short put I sold for a total gain of $34. As for SPLG and F, both puts expired worthless so I made the max gains on those positions of $51 and $16.

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