galeno
Commander
KISS & STC
Posts: 221
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Post by galeno on Jan 8, 2021 23:04:17 GMT
What do you think will happen to a TSM (total stock market) fund if interest rates on the 5 year US treasury note go up 2%?
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Post by nromsted on Jan 9, 2021 14:37:13 GMT
I think it will hurt companies which are highly leveraged, and perhaps needing to roll it over or secure additional funding. The debt/capital ratio of the US overall market is at 45% now, and the cost of servicing that debt will increase. Some companies might choose to issue new stock instead of borrowing more.
So, overall, I expect the effect of a 4x rise in the 5yr US Treasury interest rate to be negative on the stock market.
This may be a reason why the FED will be encouraged to keep rates low for a long time.
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Post by Norbert on Jan 9, 2021 15:53:27 GMT
I agree that it could be an important negative for TSM, but much depends on the speed of the interest rate move and the macro situation.
If it's gradual and is accompanied by a growing economy with no downside surprises on the Covid-19 front, not a problem. If it's sudden, growth is mediocre, and / or the vaccines won't stop a mutated virus (or the vaccines rapidly lose efficacy) that's very bad.
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Post by FD1000 on Jan 9, 2021 16:07:08 GMT
What do you think will happen to a TSM (total stock market) fund if interest rates on the 5 year US treasury note go up 2%? If my grandma had wings, she could fly to the moon.
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Post by Capital on Jan 9, 2021 16:16:23 GMT
I agree that it could be an important negative for TSM, but much depends on the speed of the interest rate move and the macro situation. If it's gradual and is accompanied by a growing economy with no downside surprises on the Covid-19 front, not a problem. If it's sudden, growth is mediocre, and / or the vaccines won't stop a mutated virus (or the vaccines rapidly lose efficacy) that's very bad. IMHO the gradual move to a 2% level is more likely than not. I also do not see rates moving drastically anytime soon. More importantly I see a relatively sidways or moderately up market possible over the next few years. Based upon 09/2020 numbers the S&P is trading at a PE of 27.3. That is high of course; and, after the last three months the PE could now be over 30. However estimates of full year earnings for 2021 are expected to be about 38% higher than 2020. If the market were to increase 10%, more than I expect, from now and earnings increased as expected the PE would be about 24.5. Corrections come in two ways. A down market to reach earnings or a sideways market in anticipation of earnings reaching it. We have a rebounding economy. I think the market will behave in a way that it expects earnings to move towards the market. I see bonds lagging in 2021; and, opportunities in interenational. I have some international positions now that are not hedged. I think the dollar will soften and unhedged international holdings will respond nicely as the dollar softens.
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Post by FD1000 on Jan 9, 2021 17:07:16 GMT
I agree that it could be an important negative for TSM, but much depends on the speed of the interest rate move and the macro situation. If it's gradual and is accompanied by a growing economy with no downside surprises on the Covid-19 front, not a problem. If it's sudden, growth is mediocre, and / or the vaccines won't stop a mutated virus (or the vaccines rapidly lose efficacy) that's very bad. IMHO the gradual move to a 2% level is more likely than not. I also do not see rates moving drastically anytime soon. More importantly I see a relatively sidways or moderately up market possible over the next few years. Based upon 09/2020 numbers the S&P is trading at a PE of 27.3. That is high of course; and, after the last three months the PE could now be over 30. However estimates of full year earnings for 2021 are expected to be about 38% higher than 2020. If the market were to increase 10%, more than I expect, from now and earnings increased as expected the PE would be about 24.5. Corrections come in two ways. A down market to reach earnings or a sideways market in anticipation of earnings reaching it. We have a rebounding economy. I think the market will behave in a way that it expects earnings to move towards the market. I see bonds lagging in 2021; and, opportunities in interenational. I have some international positions now that are not hedged. I think the dollar will soften and unhedged international holdings will respond nicely as the dollar softens. 1) Extremely unlikely the 5 year treasury (see OP) would get to 2% in the next 2-3 years. It's at 0.48% now. Even the 10 year treasury will not get there by 2022. 2) PE,PE10,earnings, inverted yield can't predict stocks in the next 3-6 months or even years. Sure, stocks are usually higher, they were higher 80% of the times in the last 40 years, so it's a good bet. Correction can come any time for various reasons and are unknown. The ones that trigger it last time, will not do it 2 years later. If corrections were known, they could be anticipated and avoided. Higher earnings doesn't guarantee higher performance either. Earning forecast are notoriously wrong. Basically, you can't forecast future performance. 3) Bond lagging in 2021? compare to what? which bonds? My HY Munis made 0.9% in one week. Of course, if rates go up, and you are a sitting duck investing in high-rated bond funds you will lose money. This is short term. You do realize that after rates go up and stabilize, your higher-rated bond funds distributions will be higher.
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Post by Capital on Jan 9, 2021 17:42:01 GMT
FD1000 thanks for your thoughts and comments. Sorry if I upset you with my thoughts about bonds.
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Post by uncleharley on Jan 9, 2021 20:15:12 GMT
What do you think will happen to a TSM (total stock market) fund if interest rates on the 5 year US treasury note go up 2%?
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Post by yogibearbull on Jan 9, 2021 20:18:49 GMT
What do you think will happen to a TSM (total stock market) fund if interest rates on the 5 year US treasury note go up 2%?
Joke? I am sure you know that Stockcharts scale for Treasury rates $IRX, $FVX, $TNX, $TYX is 10x.
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Post by Chahta on Jan 9, 2021 20:45:07 GMT
What do you think will happen to a TSM (total stock market) fund if interest rates on the 5 year US treasury note go up 2%? Well that would mean the 10 year would be at 2.5-3% I am guessing. That would indicate a super strong economy. But the TSM might do nothing if the rise was over a few years. You did not indicate a time period.
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Post by Chahta on Jan 9, 2021 20:46:07 GMT
What do you think will happen to a TSM (total stock market) fund if interest rates on the 5 year US treasury note go up 2%?
If it was 5.7% they would be sold out fast. Sign me up.
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Post by uncleharley on Jan 9, 2021 23:22:35 GMT
If it was 5.7% they would be sold out fast. Sign me up. Check the link.
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Post by Chahta on Jan 10, 2021 0:10:17 GMT
Yes it looks to be 10 times as YBB says. I do not follow that chart so I would not know myself. If it was really 5.7 would the yield curve be inverted with 30 year at 1.7%?
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Post by yogibearbull on Jan 10, 2021 1:22:17 GMT
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