US Yields Move Ahead of GDP

With little excitement in the currency markets O/N, US benchmark yields have backed up a tad ahead of this mornings US GDP report. Treasuries have managed to snap a two-day rally that sent five-year yields to a record low yesterday (+0.75% intraday) as the market expects the report to show that US growth quickened in the last quarter of 2011 (+3% vs. +1.8%, q/q).

Yields along the curve are trading higher for different reasons. The shorter end, out to 5’s, has seen more profit taking by market participants, one day after Bernanke and company pledged to keep short-term interest rates “exceptionally low,” at least until late 2014. At this weeks FOMC meeting, policy makers indicated that they are extending their low rate policy for another 18-months. Currently, futures prices see lower odds of an early 2014 hike, before the meeting it was at +20%. The benchmark yield, 10-year product, trades relatively steady at +1.97%, up from this weeks low print of +1.915% after the Fed announcement and from +2.09% at the end of last week. It’s in the long end that has led the decline, 30-year bonds trade at +3.13% (up +4bps) on bets that the Fed’s decision will spur inflation. Like most initial market moves, price movements seem to get over extended.

A stronger US number this morning should encourage further swapping out of the relative safety of US government debt into more corporate product, where yields and returns are more attractive. The Euro sovereign debt crisis and the threat of a US slowdown combined to give fixed-income a +9.8% return last year (the most in three years). So far this year, treasuries have handed investors a -0.2% loss through yesterday. The Fed’s longer term low policy rate should provide further short term support for equities.

At yesterday’s $29b 7-year auction, the final treasury issue of the week, brought a record low yield, however, it was higher than the market expected, indicating buyers’ reluctance to step in at current levels. The recent run in prices, no matter what is occurring at the Euro debt debate table, US product is a tad rich at current levels despite the Fed’s mandate. The mid-2014 language will help the belly of the curve longer term, however, at these levels, market participants seem to expect stronger data short term to trump current levels.

The Nikkei closed at 8,841 down -8. The DAX index in Europe was at 6,563 up +24; the FTSE (UK) trades at 5,787 down -8. US Dow futures remained in positive territory currently trading at 12,708 up+24.


    Other links:
    A “Dovish” FOMC

    U.S. Ten-Years:


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    Dean Popplewell

    Dean Popplewell

    Vice-President of Market Analysis at MarketPulse
    Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
    Dean Popplewell