Yielding To Reason: 10-Year Treasury Yield Correlated To U.S. Manufacturing

Heartland Advisors

Is softening Purchasing Manager’s Index (PMI) data signaling the end of the economic party after a decade-long expansion?

Or, do the numbers represent a temporary lull that will give way to continued growth? 

While the debate is far from settled, at least one indicator suggests recent manufacturing weakness may simply reflect a pause as opposed to a full-fledged slowdown. 

As the chart below illustrates, movements in the 10-Year Treasury Yield INDEXCBOE: TNX have been tightly correlated with domestic manufacturing activity. 

With yields stabilizing, the market appears to be signaling brighter times ahead for manufacturers if historic PMI patterns persist.

A rebound could be particularly rewarding for attractively valued businesses in cyclical industrial areas of the market that already experienced a pullback when macro clouds gathered during the summer. As value-oriented investors who have found significant opportunities among manufacturing and industrial companies, we would welcome such a development.

treasury bond yields correlation to industrial production us economy stock market news image november 14

This article was written by Troy McGlone, CFA and Portfolio Manager at Heartland Advisors.

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Definitions:

Basis Point (bps) is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument. CyclicalStocks cover Basic Materials, Capital Goods, Communications, Consumer Cyclical, Energy, Financial, Technology, and Transportation which tend to react to a variety of market conditions that can send them up or down and often relate to business cycles. Treasury Yield is the effective rate of interest paid on a debt obligation issued by the U.S. Treasury for a specified term.

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