Treasury Selling Abates
Updated: 02-Dec-16 04:53PM ET
Analyst: David Kelland
Treasuries fell sharply over the first three and a half days of this week but the bulls appeared to capitulate in a selling frenzy late-Thursday morning and Treasuries rebounded sharply by Friday afternoon. The economic data was slightly better than expected on balance as Q3 GDP growth was revised up to a 3.2% SAAR (from 2.9%) and the manufacturing surveys came out ahead of forecasts, particularly ISM (53.2 vs. Briefing.com consensus 52.1). The disappointing releases were consumer spending (0.3% m/m vs. Briefing.com consensus 0.5%), pending home sales (0.1% m/m vs. Briefing.com consensus 1.0%) and hourly earnings (-0.1% m/m vs. Briefing.com consensus 0.2%).
The stock market showed sharp divergence this
week as strength in financials (on the steeper yield curve) and energy
producers (on the OPEC deal) was overwhelmed by weakness in big technology
companies. I have general concerns about stocks more broadly because the 7.5-year
bull market was built largely on low interest rates and valuations do not
appear attractive enough to support another leg higher. Effects of fiscal
stimulus are unlikely to appear before the second half of 2017. In the interim,
you have a stock market battling a stronger dollar and higher interest rates
with only the expectation of larger government deficits down the road. That is another
reason to be wary of a continuation in the reflation trade. Bear markets do happen and they tend to last six to twelve months.
We noted a few times this week on the bond page that the 10 and 30-year yields faced resistance (support in price) at the 2.475% and 3.15% yield levels, respectively. They conveniently moved lower from there and I would expect a bit more progress lower in yields next week. A retest of those resistance levels is possible but a close above them would signal to me that this move higher in rates is accelerating. The 10-year yield jumped 114 basis points in less than five months so a consolidation, particularly of November's move, is in order. But I wouldn't bet on a return to sub-2% 10-year yields.
The Italian constitutional reform referendum this weekend will probably fail but the European Central Bank's Governing Council announces its monetary policy decision on Thursday. If they announce a six-month extension to asset purchases at the current EUR80 bln/month pace, that could mollify German bund bears who think that Mario Draghi will blink as the eurozone recovery gathers speed. A dovish move on Thursday could prompt some ranging in government bond yields in contrast to the general trend higher over the last five months.
- David Kelland, Briefing.com