Treasury Yield Curve Signaling Slower Economic Growth Expectations
Today’s Spotlight Market
U.S. Treasury yields continue to decline, with the 10-year Treasury note yield falling to an intra-day low of 1.53% on Thursday. This is the lowest yield for this benchmark rate since the summer of 2012. As most interest rate traders will recall, the summer of 2012 is when we saw record low yields for the 10-year notes at just above 1.40%. While current yields do not provide much benefit for investors in the long-run, if we look towards the yields available in Japan and most of Europe where negative rates can be found, 1.50% for U.S 10-years is relatively high compared to similar quality government debt.??? ?
Fundamentals
Treasury bond traders are becoming pessimistic on the state of the global economy as the yield curve continues to flatten. On Thursday the 2-yr/10-year yield curve fell below 1% 10-year premium dropping 20-basis points in a week?s time. A flattening yield curve is seen as a signal of slowing economic growth and generally hurts banks whose margins are squeezed as the generally borrow short-term and lend long-term. The longer-end of the curve received a boost from strong buying interest during the U.S. Treasury?s sale of 23 billion of 10-year Notes on Wednesday. This week also saw testimony to Congress from Federal Reserve Chair Janet Yellen who said little to completely rule out an interest rate hike at the March Federal Open Market Committee Meeting (FOMC), but did note the risks to U.S. economic growth from a stronger Dollar and economic difficulties abroad. While Ms. Yellen would not rule out a March rate hike, traders in Fed Fund futures appear to have given up hope as the March contract is now pricing in only a 6% chance of a rate hike at the March 15 & 16 FOMC meeting. While there is some talk in the media about a possible recession, if history is any guide, we would need to see the yield curve become inverted (a condition where short term rates are above longer term rates) and start to see employment start to weaken. Two conditions that we have not seen met so far.
Technical Notes? – View Today’s Chart
Looking at the Daily continuation chart for 10-year Treasury note futures, we notice prices breaking above its recent price consolidation and setting up a potential test of the July 2015 highs above 135-00. Prices are pulling away from both the 20 and 200-day moving averages and we are seeing moderate to heavy trading volume during this market rally. The 14-day RSI is now well into overbought territory with a current reading of 79.55. The September 2011 high of 131-30 is seen as the next resistance level for the March futures with support found at 130-00.?
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