Rising yields before the US-Fed meeting

01/08/2018 – 17:00: The Federal Reserve (Fed) is meeting today (Wednesday) to discuss the future of the interest rates in the US.

The US-economy is booming, which is good for corporate profits (see the results of Apple from yesterday as an example), but the boom is less good for the interest rates. Just on the day of the Fed meeting, the 10year yield on US-Notes rose to the “magic” level of 3.0%. This value was last seen in 2013 – but only for a short period of time. Rising yields have an impact on the real economy through the credit channel as financing costs for companies and consumer credits are rising.
But rising yields also impact the financial markets – in absolute and relative terms. They make share prices more expensive, since present values are falling due to the increased discount-factor and a “low” profit/loss ratio (P/E ratio) for shares suddenly no longer appears to be so “low” with rising yields, because the corresponding P/E-ratio in the bond markets suddenly makes an investment in bonds more attractive.

So it will be exciting to listen to the comments of the central bankers this evening. In chart terms, the US-yield could break out to 3.5%. Incidentally, Germany does not currently have these concerns: The federal bond was last quoted at 3% in 2011, currently the yield is 0.6%. Thanks to the ECB!

 

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