What’s next for rates as investors digest inflation data

Key Concepts

• Global rates market influence on US rates
• Debt and deficits as drivers of higher long-term rates
• Technical analysis of 10-year Treasury yields (midpoints)
• 30-year minus 10-year Treasury spread ("the knob")
• 10-year minus 5-year Treasury spread ("the fight spread")
• Curve steepening
• Stagflation argument

Analysis of Interest Rate Trends

• Global Rates Context: The discussion begins by acknowledging the influence of the global rates market, citing the German 30-year bond yield reaching its highest level since 2011. This highlights that US rates are not determined in isolation.
• Debt and Deficits: Rick Santelli agrees with the sentiment that long rates will remain "stubbornly high" due to shared global factors: debt and deficits. He argues that these factors lead to increased bond issuance, which puts upward pressure on bond yields.
• Technical Analysis of 10-Year Yields: Santelli uses a midpoint analysis to predict the direction of 10-year Treasury yields.
  • He calculates the midpoint between the April 2024 high (4.70%) and a key bottom (3.62%), arriving at 4.16%.
  • He then calculates the midpoint between the key bottom (3.62%) and a more recent high (4.79%), arriving at 4.20%.
  • He suggests that these midpoints (4.16% and 4.20%) have acted as "magical" levels of support.
  • He believes that yields will generally hold above these levels and trade sideways.
  • A weekly close below 4.15% would invalidate his bullish outlook.
• Treasury Spread Analysis: Santelli uses the 30-year minus 10-year Treasury spread ("the knob") and the 10-year minus 5-year Treasury spread ("the fight spread") as indicators of future rate movements.
  • Both spreads are the widest they've been in approximately four years (since September 2021).
  • He interprets widening spreads as a signal that rates are likely to rise on the long end of the curve.
• Curve Steepening: Santelli anticipates a curve steepening, where short-term rates (e.g., 2-year yields) decline while longer-term rates (10-year, 20-year, 30-year) remain stable or increase.

Arguments Against Lower Rates

• Deficit Concerns: The discussion touches on the historical lack of market reaction to deficit concerns and increased bond issuance. Santelli suggests that this dynamic is changing, and these factors are now exerting upward pressure on rates.
• Year-to-Date Performance: Santelli points to the year-to-date chart of yields, noting that the lowest close was 4% and that there was a significant bounce from that level. This supports his view that rates are unlikely to move significantly lower.
• Economic Outlook: Santelli expresses skepticism about the stagflation argument. He aligns with Rick Rieder's view that the economy is performing better than many anticipate, with positive developments offsetting negative factors. He believes the economy is "cooking" and will perform better than expected.

Conclusion

Rick Santelli presents a case for sideways-to-higher interest rates, driven by global debt and deficits, technical analysis of Treasury yields, and widening Treasury spreads. He anticipates a curve steepening, with short-term rates potentially declining while long-term rates remain elevated. He dismisses the stagflation argument and expresses optimism about the underlying strength of the economy.