10-year US treasury bonds are the new fear indicator

Posted on 15 April 2014 with no comments from readers

Traders worried about escalating tensions between Ukraine and Russia have turned to 10-year treasury bonds as their main indicator of fear in the markets, veteran trader Art Cashin told CNBC on Monday.

But so far Wall Street is not worried about the Ukraine and recovered some of its recent sell-off on better than expected US retail sales, albeit a one per cent monthly gain in a year was not exactly mind blowing.

Stocks moved in lockstep with benchmark 10-year Treasury notes during Monday’s trading session, rising 100 points when yields reached session highs and edging lower when yields dropped, said Cashin, UBS director of floor operations at the NYSE.

This type of fixed income security offered by the federal government has been taken as a benchmark by the traders following the general practice of considering them for calculating changes in the interest rates, mortgage rates and tracking other financial bills. Although treasury notes are issued with more than one time period for maturity like one year, five years, seven years etc, the note with ten-year maturity gets the highest nod to check the health of the stock market and business not only in the US but also in other nations.

With treasury bonds and treasury bills, the T-bills give investors options to increase their income with the interest rates received from the government with the added security associated with the government. Treasury bonds are issued for longer periods of maturity up to 30 years or lower and therefore are the most vulnerable to stock market fluctuations. The same is the case for treasury notes too and this makes the 10-year T-notes the most volatile security.

Whenever an internal or external development affects the stock market, the same impact is showered on the Treasury securities. The rise in the values of investments and hence the rates of interest is expected by everyone except for an alarming increase that hints at an upcoming crash or bear rally. This has happened many times in the history and has sent the US and other economies to financial depression. Monday’s jump in the stock values is considered to be one such signal by many.

Stocks bounced back when yields returned near session highs, he said. Treasuries measure fear better than the Vix, and traders look to them to parse through news headlines, Cashin said. Yields reached highs of 2.66 per cent Monday…