Monday, November 3, 2014

Hard to Argue With Higher Yields

On Friday I talked about a ‘trapdoor’ opening to lower Treasury and Eurodollar prices, especially in the event of trend growth consistent economic reports.  This morning’s release of Manufacturing ISM showed stronger than expected with decent gains in new orders, production and employment.  Price pressure was softer, but a growing expectation for energy dampened inflation leaves this figure less impactful.

Signs continue to point toward lower Treasury and Eurodollar prices and for the market to price greater likelihood for a initial policy rate action in mid-2015.  Technical conditions are bearish.  Positioning finds would-be shorts anxious on the sidelines.  Policy guide continues to point toward moderation which implies appreciation for employment gains and growing acceptance that inflation will follow. 

For guide, a move in EDZ6 earlier suggested toward 97.75-.90 would be consistent with a 10 year Treasury yield of roughly 2.5-2.6% from current 2.38%.  Finally, I am increasingly comfortable that the Cyclical Yield Low has been set and there shall not be a new yield low between here and the end of March 2015.  There is a strong historic reference to this prediction and little reason to expect current conditions are vastly different to that seen over the last 15 years.   

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