Do you ever wonder about the magic behind those glorious orange, yellow, red and purple colors of the leaves in autumn?

The magic, of course, is actually science.

Leaves are green because they contain an abundant amount of chlorophyll, causing their green pigment. Chlorophyll is also responsible for photosynthesis, the crazy process that trees and other plants use to convert sunlight into energy. In the fall, chlorophyll production is shut off automatically, and trees use up all the remaining chlorophyll. What remains are carotenoids and xanthophylls – other, less dominate orange and yellow pigments in the leaves that don't fade away like chlorophyll.

What about those awesome reds and purples?

Those colors are the result of some trees producing anthocyanin, a pigment that is dependent on several factors for its ultimate color. While it is not totally certain what those factors are, the science suggests it has something to do with the declining levels of daylight and changes in water and temperature. Whatever that magic science is, this finally explains why the big, beautiful maple tree in our backyard is never the same color from one autumn to the next!

The changing of the seasons also got us thinking about interest rate changes. While at times it can seem like magic is also behind these changes, it is more about changing market sentiment and the economic environment. Below is a long-term chart going back to 1969 plotting the interest rate or yield on the 10-year U.S. Treasury bond (in green) and the year over year change in nominal U.S. Gross Domestic Product (GDP, in blue).

What is notable is the high correlation between the two lines: generally, when GDP is moving higher or lower, the 10-year Treasury interest rate is also moving higher or lower, respectively. While this relationship is focused on the current economic environment (given the GDP measurement used), the correlation is even stronger with leading economic indicators, or those economic metrics that tend to have some predictive value about how the economy will perform in the future. In the chart below, the yield on the 10-year U.S. Treasury bond is plotted against the Conference Board's U.S. Leading Economic Index in blue:

The change in the 10-year interest rate from north of 3% in the fourth quarter of 2018 to today's 1.7% is a big move that can be explained by the significant decline in economic growth we have witnessed over that period and will most likely continue to see in the future.

No magic, just economic expectations.

Now go out and enjoy the leaves!

For more information on this topic, contact Russell Moenich.

 

Photo by Mari Helin on Unsplash.

 

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Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

On Fall Leaves & Interest Rates | Sequoia Financial Group

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