US 2-Year Treasury Yield Hits New High on Staunch Fed Policies

The U.S. two-year Treasury yield reached a new 10-year high of 2.98% on Thursday on the Federal Reserve’s decision to keep the targeted federal funds rate between 2% and 2.25% and maintain its plans regarding future rate hikes.

The Federal Open Market Committee said in a statement that the labor markets remained strong and that economic activity “has been rising at a strong rate”: over the trailing 12 months, the overall inflation and the inflation excluding food and energy remain near 2%.

FOMC sticks with ‘statutory mandate’

The Committee reiterated its “statutory mandate” to foster maximum employment and price stability and added that further gradual increases in the target federal funds rate will be consistent with the strong labor and economic markets.

CNBC columnist Thomas Franck said Wells Fargo & Co. (WFC, Financial) rates strategist Michael Schumacher called the announcement a “benign, yet boring” statement, saying it included no comments about the volatile October market. Schumacher said the Fed was not concerned about a 10% nosedive during a two-week period.

New feature in Buffett Indicator page

Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator climbed back to 140.6% on Friday, up from the Nov. 2 valuation level of 135.4%. Based on the current market level, the U.S. stock market is expected to return -1.8% per year over the next eight years.

As illustrated in the chart above, we have added a new “two-year Treasury yield” line to the “predicted and actual returns” chart. Each line of this chart offers a different perspective on the market:

1. The red line graphs the predicted returns if the ratio of the Wilshire 5000 full-cap index to gross domestic product averages 120% (overvalued) over the next eight years at current levels.
2. The blue line graphs the predicted returns if the ratio of the Wilshire 5000 to GDP averages 80% (fair valued) over the next eight years at current levels.
3. The green line graphs the predicted returns if the ratio of the Wilshire 5000 to GDP averages 40% (undervalued) over the next eight years at current levels.
4. The yellow line graphs the actual, eight-year annualized returns of the Wilshire 5000 since 1970.
5. The new cyan line graphs the historical two-year Treasury yield since 1976.

See also

GuruFocus tracks several model portfolios that have outperformed the Standard & Poor’s 500 index benchmark over the past 10 years, including the most broadly held portfolio, the undervalued predictable portfolio and the Buffett-Munger portfolio. The first strategy considers the companies with the highest number of guru owners, while the latter two focus on Buffett and Charlie Munger (Trades, Portfolio)’s key investing principle of buying good companies at fair prices.

Disclosure: No positions.

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