US10Y in Limbo - but when will that change?
US 10 Year Rates have been trading sideways this quarter and there are number of reasons for this:
Ready bond buyers - With yields above 1.5% this means that hedge fund traders are required to adjust their Bond/Stock ratio of holdings in their portfolios accordingly. With the front end of rates curbed by Fed policy, bond buyers have nowhere to go but to the long end of the spectrum.
Jobs Uncertainty - Fed officials and the market as a whole had been expecting a jobs print around 1 million in the May NFP print, the shock shortfall caused a bond rally (and yield decline) as markets realised that the Fed tapering horizon would be pushed out further. The Fed's has clearly stated that a return to low levels of unemployment is required before it will change its policy, so without new jobs this cannot happen
CPI indecision - While April CPI was strong and caused a short term bond sell off (and rise in rates) a large chunk of this is attributed to to firstly base effect since April 2020 was low. Secondly some aspect of this is transitory - but markets have yet to decide how much CPI is here to stay. As the effect of stimulus checks abate, spending could inevitably slow from its rapid pace easing pressure on prices, so it will take the next few months to determine this picture.
This leaves the market in limbo until a clearer direction has been provided by market data. So what would cause yields to start moving again towards the 2% target that most banks and economists predict for the EOY target.
June/July/August/September NFP data begins to show recovery of the 8 million jobs that were lost during 2020.
CPI data holds firm over the Summer months.
Fed confirms it will commence tapering its bond purchase program.
The outlook for the US remains positive indicating that the data is coming, the question is will it be in the next few months or will we have to wait until next year? In the meantime if you are bored of waiting for US rates to rise, the DE10Y is moving nicely as the economy strengthens, vaccinations rise and bets on the ECB tapering begin to take place.
Ready bond buyers - With yields above 1.5% this means that hedge fund traders are required to adjust their Bond/Stock ratio of holdings in their portfolios accordingly. With the front end of rates curbed by Fed policy, bond buyers have nowhere to go but to the long end of the spectrum.
Jobs Uncertainty - Fed officials and the market as a whole had been expecting a jobs print around 1 million in the May NFP print, the shock shortfall caused a bond rally (and yield decline) as markets realised that the Fed tapering horizon would be pushed out further. The Fed's has clearly stated that a return to low levels of unemployment is required before it will change its policy, so without new jobs this cannot happen
CPI indecision - While April CPI was strong and caused a short term bond sell off (and rise in rates) a large chunk of this is attributed to to firstly base effect since April 2020 was low. Secondly some aspect of this is transitory - but markets have yet to decide how much CPI is here to stay. As the effect of stimulus checks abate, spending could inevitably slow from its rapid pace easing pressure on prices, so it will take the next few months to determine this picture.
This leaves the market in limbo until a clearer direction has been provided by market data. So what would cause yields to start moving again towards the 2% target that most banks and economists predict for the EOY target.
June/July/August/September NFP data begins to show recovery of the 8 million jobs that were lost during 2020.
CPI data holds firm over the Summer months.
Fed confirms it will commence tapering its bond purchase program.
The outlook for the US remains positive indicating that the data is coming, the question is will it be in the next few months or will we have to wait until next year? In the meantime if you are bored of waiting for US rates to rise, the DE10Y is moving nicely as the economy strengthens, vaccinations rise and bets on the ECB tapering begin to take place.