Wednesday, April 29, 2015

Treasury Curve 5-30 Jumps with Bund, Oil and Fed

The long end of the Treasury curve is underperforming as traders adjust to the surprising U-Turn at Zero interest rates for the Bund.  Bund sentiment had reached extreme bullish levels nearing zero rates with many traders becoming comfortable that negative yields would be forthcoming. There would have been more than a few traders expecting lower European rates would continue to hold down U.S. Treasury rates with strong foreign demand.  Bund rates jumped this morning on the back of Gundlach turning on Bunds, Joining Gross.  


For Treasuries, even the weaker GDP report today has been unable to quench the selling appetite.  There is a hearty core of traders that would look to last year and even the last several years and note a disappointing quarter mixed into above trend growth through the balance of the year.  While the weak quarter performance makes it less likely the Fed will begin its ‘normalization’ of rates in June, the long end of the Treasury curve is seemingly ready to look beyond that event. 


The Treasury 5-30 yield spread reaches above 130 for the first time this year testing resistance at the 200 day moving average (132.7 bps).  The 50 day moving average has crossed above the 100 day moving average.  The bullish advance of the 5-30 yield curve steepening has been rather dramatic, coming from a low of 105 on March 17 (Happy St. Patrick’s Day). 


Let us not forget ancillary markets; we had earlier discussed the potential implications of a recovering energy market, explaining that there would have been more than a few who believed that weaker oil prices would add to deflationary conditions, driving the demand for Treasuries.  Therefore it was further argued, when oil prices recover, there could be an outsized reaction to the long end of the Treasury market on the back of, ahem, ‘deflated’ expectations for oil causing lower inflation.


The Fed offers a FOMC statement in a few hours.  The last time they met, they provided the greatest surprise in at least 5 years when they cut their policy rate path projections.  My firm belief would be that the Fed would not want to err on surprising the market similarly this time around and they may not even want to surprise in a similar direction (bullish on rates).  Therefore, the risk appears toward higher yields, despite weaker GDP data today. 


Someday, probably not today (lest you count this note), someone may even suggest that the bullish advance in oil may be demand driven. hmmm






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