There is even some talk about tapering in July but it’s like Portugal today in the US bond market as yields shoot higher.
- 5-year +15 bps to 1.57%
- 10-year +19 bps to 2.69%
- 30-year +16bps to 3.65%
The real story is the contagion elsewhere. Fellow central banks have been displeased with the bond market reaction and that’s what was behind the dovishness from the ECB and BOE yesterday. German 10s are up 8 bps to 1.72% (note the 100 bps spread, which is bearish EUR/USD) and will encourage Draghi to stay dovish.
Look at Canada where 10s are up 13 bps to 2.55%. For a place like Canada, it’s tough to make a coherent argument that yields should be lower. The overnight rate in Canada is already 1.00% and there is no QE plus the market is less liquid. If the US economy ever gets strong enough to raise rates, Canada will be hiking them as well. To me it shows that bond selling is driven by momentum and fund liquidation.
If that’s the case, it will probably continue. The bond market is the freight train of financial markets, few hands are strong enough to step in and fight it.
As yields approach 3%, the yield differential between the US and Germany and US and Japan becomes overwhelming and extremely bullish for the dollar. To me it’s clear that the Fed is tapering to mitigate the financial risks, not because of a threat of inflation. However, there is no way the economy meets the inflation, unemployment and (especially) growth forecasts from the Fed so it will be a symbolic taper more than anything.
