10 Year Treasury Level Hits Lowest Yield Since 2017
As the trade war with China heated up this week, investors rushed to safety with the 10-Year U.S treasury hitting its lowest level since Nov 2017 with a yield of 2.3% yesterday.
Our view remains that a trade deal eventually gets done, but not as fast as most would like. The potential for a 25% tariff on the remaining $300 billion of Chinese imports has increased and ultimately could result in about a 0.5 to 1% hit to U.S. GDP; potentially twice that to the Chinese economy.
Retaliation by the Chinese could also cause our import costs to rise, increasing the likelihood of a rise in inflation. While these numbers are not catastrophic, they are not in the best interest of either economy which is a primary reason we expect a deal to get done later this year. Our base case for markets is that volatility continues this summer with a garden variety 10-12% type of correction likely to occur. We we view this as a buying opportunity; not a reason to panic. On average, the market pulls back about 10% annually, so with all the headline risk we expect nervous hands to hit the sell button, creating opportunity for long term investors.
This drop down to 2.3% in treasury yields makes dividend paying stocks, a core focus at our firm, more attractive. Even during the decline on Thursday, many of our dividend growers like Coca Cola, General Mills and Medtronic all rallied as the balance sheets at these companies support to continuation of increasing payouts to shareholders which is much more than one would expect from investing in bonds at these levels.
As we have witnessed 100% of the time these past years, each sell-off has created long-term opportunities. I don’t see the “Trade War’ as being anything different than the last 100 scary headlines. They do make for good media though.
Speaking of good media, I will be back for my Friday spot on Fox Business on Making Money with Charles Payne during the 2 pm Eastern hour to discuss the latest headlines moving markets. Tune in if you get a chance. Please reach out to your advisor if you have any questions or concerns.
Have a great Memorial Day weekend!
– Robert Luna, CEO and Chief Investment Strategist