10-Yr Treasury Yields: Higher or Lower?
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April 24th, 2009 by AdvisorAnalyst
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Econompic Data looks at the possible direction for 10-Year Treasurys. On one hand you have the supply issue; on the other hand you have deflation and further deterioration, combined with the Fed’s impetus to purchase lond-dated treasurys which could drive yields down further:
Higher –> Supply: Across the Curve
Treasury bonds are taking a severe drubbing and the yield on the benchmark 10 year note is approximately at the level which prevailed on the day when the Federal Reserve announced quantitative ease (2.96 percent currently).
One participant noted that the 200 day moving average on the Long Bond was 3.798 percent and the market penetrated that level this morning as a sharp knife would melting butter.
The yield curve has steepened sharply and participants are deeming the belly of the curve particularly odious. The 2year/10 year is once again close to 200 basis points and the 2year/5year/30 year butterfly has returned to 93 basis points after a foray into the low 100s.
Dealers report rate lock selling and fear of very heavy Treasury supply next week. As I have mentioned too often the Treasury will announce around $ 100 billion of new supply tomorrow. It will consist of 2year,5 year and 7 year notes.
Lower –> Quantitative Easing / Continued Economic Deterioration: Zero Hedge
n light of next week’s scheduled meeting of the Fed, we thought we would look at the potential for further announced quantitative easing. Last month, the Fed rocked most major markets with the announcement of a major purchase of long rates to push down yields. Since then, many have dismissed the purchases as a one-time event that are not likely to repeat. However we have to question that thinking as it is very much in line with the pre-crisis mentality that quantitative easing is the equivalent of a nuclear bomb in a central bank’s arsenal and the unpredictability of any resulting inflation would destroy all credibility that a central bank may have to price stability.
There has been a lot of criticism of Big Ben (us included) but one thing that has come out is he is not afraid to take relatively risky moves to combat whatever he perceives as the biggest threat. As we have noted before, he has clearly revealed his playbook in the past and we see little indication that he will stray from it going forward. On the balance between inflation and deflation, much has been made of the Chinese response if we try to print our way out of this situation but the much larger problem has always been deflation. Combining what we know about the available policy options and the effectiveness of the last round of QE, we have to believe that more purchases of long rates are on the table as a serious consideration.
We are not saying that the Fed is deaf to the concerns of price stability; indeed, the specific concern is addressed in last month’s minutes.
Also, some participants were concerned that Federal Reserve purchases of longer-term Treasury securities might be seen as an indication that the Federal Reserve was responding to a fiscal objective rather than its statutory mandate, thus reducing the Federal Reserve’s credibility regarding long-run price stability. Most participants, however, saw this risk as low so long as the Federal Reserve was clear about the importance of its long-term price stability objective and demonstrated a commitment to take the necessary steps in the future to achieve its objectives.
However, consumer spreads continue to stay at high levels.
Additionally, long rates have given back much of the gains made from the time of the previous announcement.
In light of the minimal impact of the announced $300B bond purchase last month, we have to think that the Fed will give it at least one more go. The Fed can really only directly control the benchmark - if the Treasury figures out a way to strong arm banks into flowing credit again, that may put a stop to further QE but that isn’t a likely scenario in the short-term.
At this point the issue of deflationary pressure does seem to be the 800-pound gorilla in the room.
Source: Yahoo
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Tags: 10 Yr Treasury, Basis Points, Credibility, Crisis Mentality, Drubbing, Economic Deterioration, Federal Reserve, Foray, Impetus, Lond, Moving Average, Nuclear Bomb, Price Stability, Sharp Knife, Time Event, Treasury Bonds, Treasury Yields, Treasurys, Unpredictability, Yield CurvePosted in Bonds, Credit Markets, Economy, Markets |
