The 10-year at 3% – Bring It On!

The 10-year at 3% has spooked equity markets. But it is an indicator of endogenous improvements in inflation and growth expectations, and equities should hope that long-term yields rise further – as we think they will – and be concerned if they don’t. The salutary rise in inflation expectations is connected to recent high oil prices, and should continue as oil stays in this new high range. Improving growth expectations should continue based on forward earnings growth, tight credit spreads, bank lending growth and housing transaction growth. Higher yields indicate that Fed policy normalization is working – if the Fed were too tight, yields would be falling. History indicates that increased Treasury issuance is unlikely to make a difference in yields one way or the other, and that higher yields are consistent with positive and above-average equity returns.