We came into last year with the idea that despite a historically low disposition at 3 percent, the 10-year yield had become stretched at a relative performance extreme. In less than two years, yields had run up over 100% above the July 2012 cycle lows around 1.4 percent. Even in context of previous rate tightening cycles, such as the one in 1994 that had caught the market offsides – the move was massive. When expressed on a logarithmic scale, the less than two year rip was the most extreme in over fifty years.
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Not surprisingly, when viewed in this light, our expectations going into last year were for 10-year yields to retrace a significant portion of the move; hence, strategically we favored long-term Treasuries relative to U.S equities, which by most conventional metrics as well as our own variant methods – were also extended. To guide the arc of those expectations, we referenced throughout the year the complete retracement profile of the 1994/1995 rate tightening cycle – as well as an inverse reflection of the secular peak in yields from 1981 that momentum was loosely replicating on the backside of the cycle.
With a year of daylight between that extreme, yields are still following both retracement profiles – with 10-year yields just today feathering the panic lows from last October. While respective retracements in both Treasuries and equities may manifest over the short-term, strategically speaking, we continue to favor Treasuries – considering that the U.S. equity markets remained relatively buoyant last year.