Fed Takes Backseat as European Yields Drive Market

It used to be common knowledge that the Treasury trade was all about the Federal Reserve. Once the Fed stopped buying bonds and started talking about raising rates, yields would return to more historically normal levels, and the bond rally would finally end.

At least, that’s what Wall Street used to think.

This week, yields of long-term bonds (specifically, the 30-year Treasurys) have dropped to the lowest levels of the year. This even as the Fed continues to be on a pace to end quantitative easing, and likely raise rates in the first half of 2015.

But recently, Treasurys have been driven by the historic lows seen in European yields. Yields in the euro zone have plunged due to poor economic conditions, and expectations the European Central Bank may take action by easing.

And when faced with an Italian 30-year yield of 3.6 percent, or a German 30-year yield of 1.7 percent (not to mention a Japanese 40-year yield of 1.8 percent), buying a U.S. bond in order to capture a yield just above 3 percent seems like a pretty good way to go.

“Remember how cute it was in the beginning of the year, when we kind of thought that the tapering of QE would potentially have the Fed lose control of long-term rates?” Jim Iuorio of TJM Institutional Services said Thursday on CNBC’s “Futures Now.” “The opposite has happened. As a matter of fact, now the tapering of QE is a secondary influencer on the long end. Right now, it’s all about Europe. The money just keeps getting flooded into the system, and it has to find yield.”

“We say ‘wow, [the 30-year yield] has hit a 2014 low—it doesn’t look low compared to a lot of the European yields,'” he added. “So in my opinion, it probably goes a little lower still.”

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza