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“True courage is being afraid, and going ahead and doing your job anyhow, that’s what courage is.” – Norman Schwarzkopf
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Just as Wall Street brokerage firms have been tripping over themselves to upgrade their views of the US economy and forecast a soft landing as opposed to a recession for the US economy, Fitch came out of the blue last night and downgraded their rating of US debt from AAA to AA+. The rationale behind the downgrade had nothing that couldn’t have been said at any point in the last couple of years, so the timing is curious. Then again, if you’re going to issue a downgrade, maybe it’s better to do it during a period of relative calm rather than in the middle of a period of heightened volatility like S&P did back in 2011.
Market reaction to the downgrade has been muted. Equities did sell-off overnight but have rebounded off their overnight lows and are now pointing to a decline of 0.6% at the open. The only economic report of the day was ADP Employment which blew past expectations once again. Earnings results have also been positive, but stock price reactions to those results remains underwhelming as investors start taking profits following the massive gains from the first half of summer.
While the US debt downgrade should theoretically cause higher interest rates, as we saw back in 2011, that was not the reality. This morning, yields are pretty subdued with little in the way of changes across the curve, and any moves have been to the downside. From a longer-term perspective, though, if the charts of the 10-year and 30-year US Treasury yields were stocks, technicians would likely be bullish.
After tests of the 4% level this year back in early March and early July, the 10—year yield is once again bucking up against 4%. The more often the yield tests this resistance level, the weaker it tends to get, so when and if yields do convincingly break through 4%, they’re likely to immediately test the highs from late last year.
If recent moves in the 30-year are any indication, more upside in the 10-year yield is likely. Yields at this part of the yield curve have already broken through this year’s resistance levels and at just under 4.1% are at the highest level since November.
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