Market Brief — Wednesday 9/19/18

Today belonged to the Dow Jones Industrial Average, which cleaned up a “gap” from late January. Markets tend to leave a gap or two between the opening and closing prices, but this market has been meticulously cleaning up after itself. Bulls are looking to drive the market higher, while Bears are looking to the Fed’s continued tightening to bring stock prices down.

Treasury yields have been on a relentless tear to the upside lately and both 10- and 30-year yields closed gaps that formed back in late May. The only rational explanation for this recent rise in yields is the possibility that insurers are raising cash to pay claims from the damage caused by hurricane Florence. Insurers generally hold excess cash in the form of U.S. Treasuries, which they sell when they need cash. With a record short position on Treasuries, that is likely even shorter now, yields had only one direction to go – up.

Ten-year Treasury yields are back at their seven-year highs, while 30-year Treasury yields are at their four-year high. Since most bond investors are long-term investors, it is unlikely these former buyers will look to sell any time soon. As it stands, investors seven years ago and four years ago respectively, have received their dividend payments without any gain or loss to their principal. Their investment in Treasuries has been working as expected.

For those worried bond prices are about to collapse, keep in mind, 10-year Treasury yields are at their seven-year high and 30-year yields are at their four-year highs while speculators are at their shortest speculative position in history. If the speculators can’t get yields to press higher now, then it seems unlikely they are going higher. Plus, as the Fed tightens, history shows yields fall, which suggest the biggest short-squeeze in history is coming to the Treasury market. Should a short-squeeze occur, yields are going down further and faster than most believe.