Thursday, August 15, 2013

U.S. Treasury 5-30 Yield Cruve



The yield spread between 5 and 30 year U.S. Treasuries is roughly 227 basis points (bps).  There may be some developments in this important spread that will prompt further examination over the coming weeks and months.          

I would like to take a look at the U.S. Treasury yield spread between 5 and 30 year maturities.  This is an important spread normally and may be more so given the prospects for changing Federal Reserve monetary policy conduct over the coming years.  I have reason to believe that the 5 year treasury will increasingly be pressured by prospects for policy rate changes which will be the main focus for the normalization of monetary policy. 

Even in normal times we tend to see a regime change by the Fed from aggressive accommodation to steady policy intent accompanied by a flattening yield curve development.  This is generally the result of expectations that nearby lifting of policy rates will have a greater impact on shorter dated treasury instruments and that longer term bonds will benefit from reduced prospects for higher inflation due to a vigilant Fed. 

This time around however, the Fed will be carrying extensive SOMA baggage throughout much of the term of normalization of monetary policy.  Partly for reason of their mandate to support the banking industry, but more particularly to practical monetary policy application, the Fed will hold much of the $3.4T in Treasury and Agency mortgage-backed securities and allow these to bleed from their portfolio largely through maturation.   These holding will all else equal, result in the need for higher policy rates to accomplish a normal policy initiative.  



 


Technically, note that the spread depicted with a candlestick chart shows a ‘bearish shooting star’ formed at the recent August 8th spread high of 236 (chart compliments of Bloomberg).  This brief strike above 235 bps and failure point further to the resistance seen at the same level test in mid-May.  

Today, the spread has traded to a low of 225.3 and has rebounded to 228.8.  However, the lower jobless claims reported today along with other constructive economic data are expected to prompt increased expectations that the Fed will move forward with tapering of securities purchased in September.  This too may quicken a similar reaction in the yield spread as was seen when on May 22nd, Bernanke indicated in Congressional testimony that it was time to ready for the tapering of securities purchased.  At that point, the 5-30 yield spread was also near 235bps but fell to 207 bps.     

I believe comments are now available to be made on this site.  All the best, Marty McGuire

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