The sizeable equity market selloff over the last two weeks has led to a flight to safety, pushing US Treasury 10-year yields to all-time record lows and below 1% for the first time ever. For investors with a diversified asset allocation this has been a benefit to portfolios, as while US stocks are down 7% year-to-date Treasuries are up 6%1.
But with yields at 1%, how much juice is left2?
The drop in yields has pushed bond valuations to equally extreme levels. Some may want to quote the US 10-year yield versus its long-term historical average (6.08%) and proclaim that it is 85% below that level, and therefore really rich! However, that is misleading as we have been in a much different market the last 10, 5, or even 3 years. It would be like comparing Reggie Miller’s three-point shooting to James Harden’s – two great shooters, but Harden is playing in the era of taking as many threes as possible. Not a fair comparison.
A better gauge of valuations is to evaluate the US 10-year yield versus its 36-month exponential moving average (eMVA). I won’t go into the statistical properties of the eMVA, much like how I usually gloss over the statistical backing related to taking as many three-pointers as you can when talking hoops with traditionalists, but it basically places a greater weight and significance on the most recent data points. An exponentially weighted moving average, therefore, reacts more significantly to recent price changes than a simple moving average (SMA), which applies an equal weight to all observations in the period.
As of right now, as shown below, the US 10-year yield is 56% below its 36-month exponential weighted moving average. This marks the largest discount to a 36-month eMVA ever. More than during the dot-com bubble, financial crisis, 2011 US sovereign downgrade, and more recent risk-off moves in 2016 and 2018.