Category: Fixed Income

Treasury, municipal and corporate bonds

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T-Bonds Burn, RBA Minutes Next

From Adam Button on AshrafLaidi.com:

…..The direction of the bond market in recent weeks has been a major driver but what was notable on Monday was the divergence. Bund yields were up 2.5 basis points while 10-year Treasury yields were up 9 bps.

This might be the start of a new stage for bonds. In the rout, everything was being thrown overboard but now market participants are looking through the wreckage to decide what’s worth keeping. Ultimately, the ECB is still buying 60 billlion euros of bonds per month and that may keep bund yields pinned, at least relatively.

Read more at T-Bonds Burn, RBA Minutes Next.

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GDP, the Dollar and Treasury yields

Interesting to see how Treasury yields and the Dollar reacted — or failed to react — to the sharp fall in first quarter GDP growth. But first a great summary by Matt Phillips at Quartz:

Move along. There’s nothing to see here.

Well, if you must know, US GDP growth fell to a 0.2% annualized rate, which looks pretty bad.

GDP

We told you it would be bad. How did we know? Windows. If you looked out any of them between January and March you were treated to a slush-bound hellscape of icy misery. Thankfully, spring has sprung. And there are all sorts of indications that US growth is bouncing back.

…interpreting the numbers rather than simply informing readers of the latest “bad news”. Good journalism.

Ten-year Treasury Note yields broke resistance at 2.00%. Not what one would expect if the economy was slowing and the Fed planned to sit on its hands rather than raise interest rates. Breakout above resistance indicates an advance to 2.25%. Recovery of long-term yields, however, is likely to be gradual, with much testing of support before we see a breakout above long-term resistance at 3.00%.

10-Year Treasury Yields

The Dollar Index surprised in the opposite direction, breaking support at 96. Not what one would expect if yields are rising. Breach of support suggests a test of the primary trendline at 92.

Dollar Index

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Inflation and Dollar stable

March CPI readings were much as expected, with the annual rate at zero but core CPI (excluding food and energy) close to the Fed target of 2 percent.

Core CPI

Ten-year Treasury Note yields continue to consolidate in a narrow band between 1.85% and 2.00%. Breakout above resistance is more likely and would offer a target of 2.25%. 13-Week Twiggs Momentum below zero continues to indicate a primary down-trend. Recovery of long-term yields is likely to be gradual for two reasons:

  1. The Fed is adopting a cautious stance towards lifting short-term rates; and
  2. Downward pressure exerted on long-term yields by offshore (Chinese & Japanese) purchases of Treasury securities (with the intent of suppressing appreciation of their exchange rates).

10-Year Treasury Yields

A stable inflation rate and low interest rate outlook have kept the Dollar Index range-bound between 96 and 100. Rising 13-week Twiggs Momentum continues to indicate a strong primary up-trend. Breakout above 100 would signal an advance to 110*. Failure of support at 96 is unlikely.

Dollar Index

* Target calculation: 100 + ( 100 – 90 ) = 110

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Dearth of capital investment

Interesting graph from RBA governor Glenn Stevens.

A striking feature of the global economy, according to World Bank and OECD data, is the low rate of capital investment spending by businesses. In fact, the rate of investment to GDP seems to have had a downward trend for a long time.

One potential explanation is that there is a dearth of profitable investment opportunities. But another feature that catches one’s eye is that, post-crisis, the earnings yield on listed companies seems to have remained where it has historically been for a long time, even as the return on safe assets has collapsed to be close to zero …..

US Australia Yields

Perhaps this is partly explained by more sense of risk attached to future earnings, and/or a lower expected growth rate of future earnings.

Or it might be explained simply by stickiness in the sorts of “hurdle rates” that decision makers expect investments to clear. I cannot speak about US corporates, but this would seem to be consistent with the observation that we tend to hear from Australian liaison contacts that the hurdle rates of return that boards of directors apply to investment propositions have not shifted, despite the exceptionally low returns available on low-risk assets.

What this illustrates is the limits of monetary policy to restore economic growth.

Such [monetary] policies are, then, working through the channels available to them to support demand. But these channels are financial in nature. They don’t directly create demand in the way that, for example, government fiscal actions do……

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Gold Dollar pause

Long-term Treasury yields remain in a bear trend, with 10-year yields holding below resistance at 2.00%. Breach of support at 1.85% would signal another test of the primary level at 1.65%. A lower inflation outlook is translating into lower interest rate expectations.

10-Year Treasury Yields

The Dollar Index is likewise encountering resistance at 100. Breakout would signal an advance to 104*. Reversal below 96, however, would test primary support at 94.

Dollar Index

* Target calculation: 100 + ( 100 – 96 ) = 104

Gold is also consolidating, ranging between $1180 and $1220/ounce. Reversal below $1180 would signal a decline to $1000/ounce*, while breakout above $1220 would indicate a rally to $1300/ounce.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

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Gold tests resistance as the dollar falls

Ten-year Treasury Note yields are testing support at 1.85% after consolidating below 2.00% for 2 weeks. 13-Week Twiggs Momentum below zero continues to indicate a primary down-trend. Failure of support at 1.85% would test primary support at 1.65%.

10-Year Treasury Yields

Correction on the Dollar Index has lasted 3 weeks but continues to respect the first line of support at 95.50. Rising 13-week Twiggs Momentum also continues to indicate a strong (primary) up-trend. Recovery above 100 is likely and would offer a target of 110*.

Dollar Index

* Target calculation: 100 + ( 100 – 90 ) = 110

Gold is testing resistance at $1200/ounce on the back of softer interest rates and a weak dollar. Breakout above $1220/ounce would indicate a rally to $1300. But 13-week Twiggs Momentum below zero continues to indicate a primary down-trend. Respect of $1300, or reversal below $1180 would suggest another test of primary support at $1140/$1150.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

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Gold hesitant response to weak Dollar

Ten-year Treasury Note yields are re-testing resistance at 2.00%. Recovery above 2.25% would indicate the correction is over and a rally to test the key resistance level of 3.00%. 13-Week Twiggs Momentum below zero, however, continues to indicate a primary down-trend. Failure of support at 1.85% would signal a test of 1.65%.

10-Year Treasury Yields

The Dollar retreated from long-term resistance at 100 as expectations of higher interest rates eased. Rising 13-week Twiggs Momentum signals a strong (primary) up-trend. Respect of support at 95.5 would confirm.

Dollar Index

* Target calculation: 100 + ( 100 – 90 ) = 110

Gold rallied on the back of a soft dollar and weak interest rate outlook, but failed to hold above $1200/ounce. 13-Week Twiggs Momentum below zero continues to indicate a primary down-trend. Follow-through below $1180 would warn of another test of support at $1140/$1150, while a rise above $1220 would test $1300.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

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Gold rallies on Fed “dovish” statement

The Fed Open Market Committee (FOMC) dropped the word “patient”, but market bulls responded positively to its “dovish” post-meeting statement. Jeff Cox at CNBC writes:

… the mostly dovish statement made little fanfare over eliminating the word, and in fact stated specifically that “an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting,” a phrase missing from previous communiques……

“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” the statement said.

Like I said: “…. Janet Yellen will move when the time is right. And not before.”

Ten-year Treasury Note yields broke through 2.00%, warning of another test of primary support at 1.65%. 13-Week Twiggs Momentum below zero continues to signal a down-trend. Recovery above 2.00% is unlikely, but would signal a rally to 2.50%.

10-Year Treasury Yields

The Dollar retreated from long-term resistance at 100. Rising 13-week Twiggs Momentum signals a strong (primary) up-trend. Respect of support at 95.5 would indicate continuation of the trend.

Dollar Index

* Target calculation: 100 + ( 100 – 90 ) = 110

Gold rallied on the back of a softer dollar and weaker interest rate outlook. Expect a rally to test $1200/ounce, but respect of this level would reinforce the primary down-trend. Breach of support at $1140/$1150 would confirm. 13-Week Twiggs Momentum below zero strengthens the bear signal.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

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Gold falls as Dollar soars

Ten-year Treasury Note yields are testing support at 2.00%. Recovery above 2.50% would indicate another test of 3.00%. But 13-week Twiggs Momentum below zero continues to signal a down-trend. Another peak below zero would warn of a decline to test the all-time low at 1.40%. Breakout above 3.00% appears remote at present, but would signal the end of the secular (20+ year) down-trend.

10-Year Treasury Yields

The Dollar is on a tear, testing long-term resistance at 100. Rising 13-week Twiggs Momentum signals a strong (primary) up-trend. Breakout would offer a new target of 110*, but first expect retracement to confirm the new support level.

Dollar Index

* Target calculation: 100 + ( 100 – 90 ) = 110

Gold

Gold fell through long-term support at $1200 and is testing the last line of support at the recent lows of $1140/$1150 per ounce. Reversal of 13-week Twiggs Momentum below zero warns of another (primary) decline, with a target of $1000*. Breach of support at $1140 would confirm.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

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Dollar breaks out, Gold tests support

The 5-year breakeven rate for inflation — calculated by deducting the yield on 5-year TIPS from the 5-Year Treasury yield — rallied in recent weeks and is testing resistance at 1.60%. But the long-term trend is down and we should expect another test of support at 1.2%.

5-Year Treasury Yield minus 5-Year TIPS yield

Apart from Japan, deflationary pressures are rising in all major OECD countries. Given the global trend, the Fed is likely to raise interest rates at a leisurely pace. Expect low inflation and low interest rates for the next 2 to 3 years.

10-Year Treasury yields rallied along with the inflation breakeven and are now testing resistance at 2.15%. Breakout would test the descending trendline around 2.40%. But reversal below 2.0% remains as likely and would signal another test of 1.65%.

10-Year Treasury Yields

The Dollar

The Dollar Index broke through resistance at 95.50, offering a medium-term target of 100*.

Dollar Index

* Target calculation: 90 + ( 90 – 80 ) = 100

Gold

Low inflation undermines support for gold. Spot Gold is testing long-term support at $1200/ounce. Reversal of 13-week Twiggs Momentum below zero warns of another decline. Breach of support at $1200 would signal another decline, while follow-through below $1150 would confirm.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

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