This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Interest Rates and the Yield Curve

Stocks in this article: SHY TLT HYG IEF KRE RSP

NEW YORK ( TheStreet) -- The Federal Reserve was perceived by markets as dovish when it announced its interest rate policy decision Wednesday. This incited a quick rally and a subsequent fall for a modest gain on the day.

The wild price swings can be attributed to the contradiction inherent in the press release. The current tone remains accomodative, but nothing has happened over the past few weeks to cause analysts to reassess the September meeting as the start date to tighter policy.

The chart below of the U.S. Yield curve is an example of the market's current outlook on monetary policy. The pair below is of iShares Barclays 1-3 Year Treasury Bond (SHY) over iShares Barclays 20+ Year Treasury Bond (TLT).

The yield curve has been gradually steepening as investors continue to view improving economic data as a means to an end for accommodative monetary policy. The trend is still higher, but as more dovish comments have been released by Fed officials, the pair has broken below its multi-month uptrend.

If economic data begin to deteriorate, such as with employment data on Friday, the price action should correct considerably lower.

The next chart is of iShares iBoxx $ High Yield Corporate Bond (HYG) over iShares Barclays 7-10 Year Treasury (IEF). This pair measures the relative strength of junk bonds versus an intermediate U.S. treasury bond.

This pair increases in value when the economic climate is deemed healthy for supporting lower grade companies.

The price action has moved higher as strong economic data have pushed up both rates and riskier assets. The piercing of its trend line in mid-July, however, signals that investor sentiment may be shifting.

Equity indexes look overbought at record highs, and with the Fed's target tightening date for monetary stimulus fast approaching, markets could correct lower in the near term.

The last chart is of SPDR S&P Regional Banking ETF (KRE) over Guggenheim S&P 500 Equal Weight (RSP). This pair measures the relative strength of regional banks over an equal weight equity index.

Regional banks have had an impressive run higher as the yield curve has steepened, allowing profit margins to expand. These banks are better able to borrow at short-term rates and lend at long-term rates, thus capturing the widening spread.

As the yield curve has pulled back and flattened slightly, regional banks have lost the strong bid higher they had a few months ago.

Risks that they may face ahead are a flatter yield curve as well as a declining equity market. If this were to unfold, this pair would lead the market lower.

At the time of publication, Sachais had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,164.95 -251.90 -1.45%
S&P 500 1,994.99 -26.26 -1.30%
NASDAQ 4,635.24 -48.1670 -1.03%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs