he inability of US 10 year yields to push higher
has been one of the more puzzling aspects of market reaction to the Federal Reserve’s tapering programme.
This is especially pertinent given the initial market reaction to the mere mention of it nearly a year ago
when Ben Bernanke first suggested it.
US yields jumped from 1.6% to 3% in a matter of weeks last year
, as markets fretted about the withdrawal effects of unlimited stimulus.
Now that the program of tapering has begun, yields are counter-intuitively going in the opposite direction of where markets think they should be going
, while equity markets now appear to be showing signs of exhaustion.
This flow into safer haven US treasuries and German bunds
has seen yields break below their recent floors, with US 10 year treasury yields breaking below 2.5%, and hitting their lowest levels since October last year, when they traded below 2.47% very briefly.
The key question now being asked is whether this weakness in yields is merely temporary
or the beginning of a new move lower and a move higher in US treasury prices.
Investors certainly do have concerns that growth expectations are slightly over optimistic
, particularly after yesterday’s European Q1 GDP economic data, while there remains a degree of uncertainty about the health of the US economy and the ability of the US economy to bounce back from its winter freeze up.
US treasury prices may give us some clues here and from the look of the charts there are worrying signs that we could see further US treasury price strength and lower yields.
Yesterday we saw US 10 year prices break above trend line resistance and the 200 day MA for the first time since May last year
As a directional indicator this would seem to suggest that there is scope for prices to move higher in the medium term and yields lower, towards 2.4%, and even 2.3%
. Only a move back below the 200 day MA would negate this directional change in momentum.
If this plays out as expected then the prospects for equity markets in the short term may well suggest further declines in the next month or so.
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