US 10-year bond, yield. Jan 13 , 2011

US 10 year bond , yield. Jan 13 2010

Just to hammer home the interest rate headwind factor, here is the 10 year bond on a yield basis ( resonates a little easier than price basis).  This is not EW, just my version of H&S analysis, a methodology I acknowledge not being at all well acquainted with. There is , however, also this tendency for markets to behave in a very symmetric manner and just on that basis alone there is something to worry about. We are all familiar with the phenomenon that often bad news actually is good news and v.v. .For instance if job numbers are real bad (bad news) the market shoots up as if it was good news. This is because interest rates are so low that the value of anything ,derived by the discounted cash-flow method, is operating in the parabolic range where the slightest decrease in rates tends to far outweigh the immediate negative effects of the “bad news”itself. Now 10 year rates are already up about 150 basis points from the lows of a year ago (2009 was the worst year for Gov. bonds in a lifetime, also one of the best for corp. bonds!) and are therefore no longer operating in that highly sensitive range. Nevertheless the impact can be considerable should rates actually move to 5.30%, up another 160 basis points. Put in a different way, if financial and real assets are properly valued today, they will be overvalued by about 30% tomorrow. If the yield curve does not just rise but also flattens that 30% is a material understatement.