Afraid of FC-US Treasuries Yield Converge

The biggest Treasury rally in five months is underlining market concern that President Barack Obama and House Republicans will fail to avert $607 billion in mandated spending cuts and tax increases starting Jan. 1.

Yields on 10-year Treasuries dropped the most in one day since May to 1.62 percent after Obama’s re-election Nov. 6. A figure below 1.7 percent indicates that investors expect gross domestic product to shrink by 0.3 percent next year as the so- called fiscal cliff takes effect, according to JPMorgan Chase & Co. Rates on longer-term Treasuries have converged with those of non-U.S. government bonds globally, after remaining about 1 percentage point above them in 2011.

While the economy is creating jobs, housing prices are recovering and consumer confidence is the highest in five years, bond investors are seeking safety from a possible downturn next year. Yields dropped to a two-month low on the prospect of a divided Congress stalling any budget deal and impeding the recovery from the worst recession since the Great Depression.

“The fiscal cliff is being priced in because it’s the biggest risk facing the market right now,” Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, one of the 21 primary dealers that trade with the Federal Reserve, said Nov. 7 in a telephone interview. “Without the cliff we would grow 2 to 2.25 percent.”


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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