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Michael Frost

Why the 10-year Treasury Note is Important to Emerging Markets.

| October 10, 2019

Why the 10-year Treasury Note is Important to Emerging Markets.


I look at almost all the markets from a long-term perspective. I truly believe that eventually all these markets work within a mathematical equation.  Remember, we have used this valuation method before. This is what Warren Buffett uses as his single best measure of a market.  Gurufocus calculates these values daily.  Here is their calculation on the US by Gurufocus.


As of 8/20/2019, China’s valuation is at 41, almost at an all-time low.  Why the huge difference in valuations? What would make things move back to normal?

Let's think about this for a minute.  Currency manipulation, central banks, trade wars, and political theater could all be part of this.  Let's look at the 10-year US Treasury Note to get some help.  The 10-year Treasury note has been falling off a cliff since May but has been going down steadily since last November.   This can mainly be caused by uncertainty. It is probably a combination of everything listed above.


Ten-year treasury notes 2018-2019

The ten-year note has corresponded very closely to emerging markets. When the 10-year Treasury note accelerated to the downside in May of this year, emerging markets went down.

Let's look at what happened in 2016. That was a tumultuous year.  Remember, Britain voted on Brexit and Europe was facing a lot of questions about a potential break up. Also, the Mexican peso was tanking because of some of the policies of the US government. All in all, there was a lot of uncertainty and the 10-year Treasury note headed down precipitously falling to about 1.5% where it roughly is today.


Ten-year treasury notes 2015-2018

The emerging markets also followed the 10-year Treasury note down because of all the uncertainty.  But once the 10-year Treasury note hit an all-time low point of 1.55%, the stimulus cavalry around the world really kicked in and the 10-year Treasury note started going up as well as did the emerging markets.


MSCI Emerging Market Index 2015-2018


We can probably assume with the 10-year Treasury note back to its all-time low that the stimulus around the world will really start kicking in again.  Gurufocus tells us that valuations in countries like China are close to their all-time lows. There is still a lot of uncertainty but central banks lowering interest rates and printing money can provide a lot of answers to those uncertainties. There has been a lot of stories about the demise of the world economy.  Also, if this is the low of the 10-year Treasury note or close to it, then it could like 2016 and be an excellent time to be in emerging markets and not out of them.

The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing, including stocks, involves risk including loss of principal.  Government bonds in treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. All indices are unmanaged and may not be invested into directly. 

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.