Treasury prices rallied significantly after Obama announced that Lawrence Summers – former Treasury Secretary under President Bill Clinton withdrew himself from consideration for the position of Fed Chairman which will be available in Jan 2014. Market cheered after the announcement, as this withdrawal by the current front runner and rumored to be Obama’s favorite opened the door for Janet Yellen, current Vice Chairman and the next in line to take over Bernanke.
This also represent a huge change in sentiments. Previously, market was highly receptive of the choice of Summers vs Yellen, as Summers have always been seen as pro businesses (during his tenure under Clinton administration), and would be a good choice to continue the economic recovery efforts. Yellen on the other hand is perceived to be less dovish than her boss Bernanke, and hence if she had been sworn in, market was worried that she will hasten the closing of QE tap.
However all these have changed when QE tapering has been declared a certainty. After this announcement, Yellen’s political support within the Fed and beyond puts her in a much better position to steer Fed’s tapering timeline which has been drafted during Bernanke’s tenure, unlike Summers who does not have the same political clout as she does. Furthermore, with QE Tapering unavoidable, Summers’ pro business stance is moot and the market would prefer someone who can help to oversee the transition better, someone who is less combative and more amicable, someone who can fill the Bernanke shaped hole more closely rather than another person who is clearly a different mold altogether.
Truth be told, it is highly debatable who would have been a better Fed Chairman. Furthermore, there is no guarantee that Yellen will automatically be sworn in as President Obama nor any senior figure in Obama administration has worked with her before. But this point is moot currently because market has already made its choice. Nonetheless, there is the potential for huge disappointment in the next few months if Yellen is not nominated, or post Jan 2014 when she proves to be a less than spectacular Fed Chairperson.
Hence question marks will continue to remain for current rally. Considering that QE Tapering is still expected to continue, it is unlikely that this pop in 10Y prices will translate to a start of a longer-term bullish cycle. Furthermore, Stochastic suggest that we were already overbought before the sudden rally, hence impairing further short-term bullish movement.
This notion is also reflected on the Daily Chart where price will need to clear the 126.0 in order for longer term bullish recovery. But even then, 128.0 will provide yet another resistance level, hence making it hard for current bearish pressure to be banished. Stochastic readings suggest that a bullish cycle is ongoing right now, but do not be surprised to see readings turning lower from here as we’ve seen previous peaks forming here back in June and August.
Fundamentally, we need to realize that the huge decline from 134.5 from May is not due to Summers expected to be the Fed Chairman. Hence it is unreasonable to think that the removal of Summers from the nomination roll will be able to send Treasury prices up to its former heights. If we are to see a continued rally, the new Fed Chairman (Yellen or not) must announce further stimulus pressures or perhaps announce ceilings for treasury yields in order to see Treasury prices continuing rallying in the long run.
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