Wednesday, September 24, 2014

10 Year Treasury 30 Basis Point Yield Jump Enough for Now

Treasury 10 year futures is largely unchanged from yesterday’s close, having recovered from an overnight retrace that drew trade toward the mid-point of Tuesday’s advance.  TYZ4 has firmed from the Friday 123-16 low that capped a 28 basis point yield jump since late August.  The recovery since Friday’s low has been steady and has recaptured about 44% of the prior 3 week price decline.  The steadiness of advance could be considered boring and in contrast with recent heightened focus on stronger economic statistics.   

Since early this month, the Citi Economic Surprise Index for U.S. has actually been more than halved from 47 to a current read of 21.  The 47 high in this index has recovered from an April low of -45.  On April 11, we wrote of a likely recovery in this index that bottomed on April 7th.    Without undue confidence, I believe we could see the Citi Economic Surprise Index-US fall further and for treasury yields to disappoint those looking for immediately higher yields.       

Based on my ‘Cyclical Yield Analysis’, the rise in the 10 year yield since early this month is insufficient to secure the recent 2.35% yield low as a ‘cyclical yield low’.  Instead, there is room for further backing and filling toward lower yields and still higher TYZ4 prices as year-end positioning, less sanguine economic conditions and further geopolitical turmoil unfold. 

Some traders point to extreme low implied volatility levels and reason that there is no room but up for Treasury yields.  However, longer duration treasury securities are still expected to benefit from continued Fed guidance that they will hold securities in their portfolio unsold for a very long time as they continue to advise they will not move too aggressively in firming policy rates.  

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