John Grisham writes some great books. They are engaging, quick to read and they tend to keep you on your toes for the entire book. As I read through Grisham books, I tend to find myself believing the story is about to go one direction before shifting completely in an opposite direction. Just as I begin to get comfortable with the new direction, there is another shift in the story, and as I near the end, I begin to believe the ending will be one way, but, yet again, I am left surprised with how the story concludes.
There are many different examples that we could use to allow people to relate to this idea of pivoting/shifting plots. We see it in movies and TV shows all the time as we believe one person or group to be the villain before being surprised that we were completely wrong.
Within the markets, there is a constant presence of believing investments will act one way, but they end up performing another. This surprise factor is constantly evident and that is what makes investing so difficult.
After just two months this year, we have seen this element of surprise creep back up. Heading into the year, it could have been deemed a foregone conclusion, by market participants and media outlets that rates were going up. Although the year still has plenty of trading days left in it, rates have gone against expectations and have declined over the first two months.
To start the year, rates on the 10-year were at 3.03% and through February the yield on the 10-year has fallen to 2.65%, a fall of nearly 40 basis points.
The conclusion that rates will rise over the longer term seems to be a fair conclusion, depending on how long one views the “longer term.” But the fact of the matter is that the equity volatility we have seen so far this year does not bode well for those in the yield spiking camp. And economic growth in the U.S. probably does not support yields much higher than 3.50% on the 10-year.
Given that we saw the huge rate spike in the summer of last year, we are probably in a more realistic range for yields (around 3%). But just as we don’t tend to sit back on those Grisham novels, we probably should not do that with yields. We saw a slight shift in the bond plot through the first two months and we know we can expect something else to come up before year end. We just have to stay tuned.