Recap 5-28-13: Treasury Market in the Driver’s Seat


US 10y real rates jumped higher again. At this rate, they will be POSITIVE by next week. Other asset classes responded in a predictable fashion. Dollar up, stocks well off from the highs, G3 bond markets down.

Note that the pace of the move in real yields (+70bps since early Dec) is quite fast, and not much slower than the 101bp move back at the end of 2010. Whether that episode drove the 2011 correction in risk is debatable – one could argue that the EU crisis and the US debt ceiling debate were responsible. However, there are undoubtedly a number of market participants who subscribe to the (incorrect) view that the Fed is responsible for the entire risk asset rally since 2009. As a result, the risk of further profit taking in stocks remains, despite the positive longer term picture.

Over the short term, yields have clearly moved a lot, and some consolidation appears quite possible. But the overall story here is that the US treasury market appears to be preparing for QE withdrawal ahead of its implementation date, which is expected sometime late this year. Here’s an optimistic and very rough way to look at the possible pace of the move in nominal yields:

  1. The 2s10s yield curve have typically peaked at ~275bps before the first Fed hike
  2. That implies that 10y yields can go to 3% before 2y yields start to move
  3. Historically, 2y yields trade around 50-100bps above the Fed Funds rate until the Fed signals its readiness to hike. That implies 2y yields can get to 125bps
  4. Consensus expectation for the first hike is sometime late in 2015.
  5. In aggregate that implies that 10y yields could get to ~4% by early/mid 2015, about 2 years away.
  6. Versus spot yields of 2.1%, that is a 190 bp move in 2 years, or 95bps annualized.
  7. For on the run 10y treasuries, a +100bp move is a ~5% loss in 1 year’s time, net of coupon payments.


  • US Consumer Confidence jumped to 76.2 in May vs 71.2 exp and 68.1 prev. Highest print since Feb 2008.
  • Der Spiegel wrote that the German government is backing away from austerity mandates. Citing Wolfgang Schauble saying “we need more investment, and we need more programs… if we don’t act now, we risk losing an entire generation in Southern Europe.”

Upcoming Data:

  • Wed: Spain Real Retail Sales, German unemployment, BoC, South Korea Business Survey, Australia Building Approvals, Private Capex expectations.
  • Thu: US Jobless Claims, Japan Markit Mfg PMI, CPI, Australia Private Sector Credit
  • Fri: Month End, UK Money Supply, EU CPI Estimate, Unemployment, CanadaGDP, US Personal Spending, PCE Deflator, Chicago PMI
  • Mon: Japan Capital Spending, Australia New Home Sales, Retail Sales, China Non-mfg PMI, HSBC Mfg PMI, EU PMI, US ISM, Australia Current Account
  • Tue: RBA, UK Construction PMI, Australia 1Q GDP