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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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It's either crucial, or it means nothing at all .... the 3.00% yield barrier

April 24, 2018

 

ref :- "3.00% on the US (10yr) Treasury yield is "just noise" and does not matter, economist says" , CNBC Markets

We wouldn't like anyone to think that we haven't been giving anything less than our full attention to the markets whilst we've been away for a couple of days. Active traders can't really afford that luxury unless they have a trusted support network. But for mere observers it's interesting to note what first catches the eye upon one's return ..... very often it's not actually the main story, more a function of it.

For example, and probably because we've been wondering if it's possible that the majority of currency forecasters might have misread things again, the strong US Dollar grabbed our attention. The US Dollar Index is at its highest since mid-January, and if sterling-watchers can point to Brexit concerns (as ever) and doubts over a rate rise next month that had seemed a near certainty, faltering economic data coming out of the Eurozone has got more to do with the US unit's broader strength.

Most of all though, the Dollar is being bouyed by climbing yields and the possibility that an upside break of the 3.00% barrier for the 10yr US Treasury might signify a move sharply higher ....... and that's really the hotter story.

Yesterday, the 10yr yield hit a high of 2.996% -- the highest for over four years  --  before edging back to it's current level of 2.964%. So what's causing this latest leg-up in bond yields that threatens to move them into a new trading range ? Heavy issuance of bills and bonds as the Treasury seeks to fund budget shortfalls caused by tax cuts might be expected to require higher returns for investors. Against that kind of background, the sharp rise in commodity prices (oil, base metals) and its inflationary implications are naturally putting downward pressure on bond prices and therefore upward pressure on yields.

So what about this 3.00% level that's so under threat ? As you would expect with such a round number, it's not a "technical" barrier, the break of which would have chart-based trading systems (and their operators) getting over-excited ..... it's a psychological one. But the fact that 3.00% has no inherent significance beyond the fact that it's a neat and tidy round number doesn't necessarily mean that it's not hugely important.

For some, a break would signify an end finally to the (very) long bull market in bonds and a clear path to higher yields. That has clear knock-on effects for mortgages and other financial instruments that use 10yr Treasuries as a benchmark and could thus undermine expectations for economic growth, both in the US and beyond. And many are of the belief that we are close to the point when rising yields will prompt a noticeable switch of investment from equities into the rising returns on offer in the bond market.

Others believe that the importance of the 3.00% barrier is being exaggerated by traders who like the convenience of round numbers. "In real terms," they might ask "what is the difference between 2.99% and 3.01% ?" And it's certainly true that quite frequently breaks of levels signposted in advance as important turn out to be damp squibs. But apart from anything else, there's an awful lot of credibility being invested in the fact that this particular barrier is key. With yields already knocking at the door, there's a fair chance we'll discover very soon just how significant a break of 3.00% really would be.

Mind you, there are some high-profile judges who are already saying that the fact that the yield has stopped short of 3.00% and is now trading 3 1/2 basis points below it, means that it's headed back down towards 2.70% rather than being able to stage a successful attempt at an upside break. In the circumstances that's a bold call and one that certainly reflects a downside view on yields .....  but if anything it enhances the credibility of 3.00% as a crucial barrier rather than diminishes it.

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