FOREX.com | May 29, 2014 16:16
A little while back we wrote that the US yield curve was sounding a warning about the US economic outlook. Longer-term yields have been falling at a faster pace than shorter term yields (as can be seen in figure 1).
The inverted shape of the yield curve is often considered a sign of deteriorating economic conditions. However, while the disastrous US economic performance in Q1 can be put down to bad weather, the economy has shown signs of life recently, not least in initial jobless claims and durable goods orders.
h3 Bonds ignore good jobs numbers, again…/h3Bond yields seem out of synch with the economic data. Take figure 2, it shows initial jobless claims alongside 10-year bond yields, going back to 2005. The last time that initial jobless claims were hovering around the 300k mark was 2006-07, back then U.S. 10-Year Treasury yields were above 5%, more than double where yields are now.
So what are yields so low? Blame the Fed. Bonds don’t seem to be moving with the economy, unless they see something we don’t, and a massive recession is just around the corner. Instead the focus seems to be on a dovish Fed Governor, Janet Yellen, who the market expects to keep rates low for a prolonged period.
Can rates continue to fall? Rather than give a definitive answer one way or the other, we take a look at two scenarios, one where yields could move lower and one where they could push higher.
The yield curve is pointing downwards, this can be a warning from the bond market that the economic outlook is bleak.
Source: Bloomberg
h3 /h3 h3 Figure 2: Yields and initial jobless claims/h3Claims haven’t been this good since 2006-7, yet yields are less than half of what they were back then…
Source: Bloomberg
h3 Figure 3: Core PCE and bond yields/h3Core PCE has been moving higher, if it continues to trend upwards it could take bond yields with it, something that I don’t think the market is prepared for.
Source: Bloomberg and FOREX.com
h3 Figure 4: The technical picture for 10-year yields/h3We are approaching a key support level at 2.39%, a break below this level could signal further downside.
Source: Bloomberg
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