Are Rates Really Out Of Control?

1.) RATES – It seems so many people think that the end of the world is either here or coming since “The 30YR Yield Is At The Highest Level Since 2007”… scream the headlines. Global inflation, bond vigilantes, soaring Gov’t debt, foreign buyers jumping ship. As usual, the headlines are a tad hyperbolic and not helpful. The 30 YR Bond Yield was at 5.12% in Oct of 2023. Now it’s at 5.24%. Twelve basis points in 3 years… that’s it! If the world was ending, it would have moved a lot more than that. What's actually happening: the yield curve got distorted when the Fed held rates too high for too long. Now it's trying to go back to normal. The short end wants to fall. The long end goes slightly up because the Fed won't get out of the way at the front. That's it. Curve normalization. Same thing happened in 2001, 2008, 2018, 2023. Every time, people screamed about the same things. Every time, they were wrong. Yes, higher rates have a negative effect on families… housing costs, transportation costs, etc. But everyone knows that rates rising too much are a problem… especially gov’t officials. And the Treasury just sent a message… “We’re not going to just sit here and watch that happen.” They announced plans to increase certain purchases of government bonds. More buying of bonds can help support bond prices. And when bond prices rise, their interest rates, or “yields,” fall. If the market believes the government is going to push back against rapidly rising long-term rates, that can change the math for everything else investors own.

2.) AI – Besides interest rates, everyone wants to talk about the boom or the bubble in AI and AI spending. I get it. Billions upon billions of dollars have been spent by the hyperscalers on the AI buildout, and it doesn’t look to slow down any time soon. So, is AI really a bubble? Based on various metrics, it would seem not yet. Below is a dashboard tracking the investment wave in AI. Currently, there are no gauges in the red. There are only two in amber, and the rest are in the healthy green stage.

3.) US DOLLAR – Some will scream government manipulation! Maybe…maybe not. It doesn’t matter. The US Dollar Index is responding to the current set of circumstances, and the index is saying "no" to rate hikes on the short end as it has dropped from about $101.50 late last month to just $98.75 today. For a currency index, that’s a lot in such a short time frame. The index is signaling immediate term (less than 3 weeks) oversold, but it is a clear-cut trend break too. So, while we might see a short-term bump up in the DXY Index, the US Dollar is still signaling lower over the intermediate (1-3 months) term. Also Gold and Bitcoin like that since they currently carry a TRENDING (>3 months) inverse correlation of -0.93 and -0.84, respectively. Those are decent tailwinds for now.