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US Treasurys are jumping around on Monday after a speech from Federal Reserve Governor Lael Brainard.
Brainard, who is generally thought of as one of the most dovish members of the Fed, said in a speech that the case for higher interest rates is “less compelling” given recent economic data.
Bonds had been selling off modestly prior to the speech, but short-dated Treasurys quickly reversed course with yields falling into the red for the day before recovering some.
After the speech, the yield curve has become slightly steeper, wider by 1 basis point, as long-dated Treasurys have sold off and short-dated Treasurys are now unchanged for the day.
Here’s a quick rundown of where the major US Treasurys’ yields sit as of 1:40 p.m. ET:
- US 2-year: 0.786% (-0.4 basis points) US 5-year: 1.224% (-1.0 bps) US 10-year: 1.684% (+1.3 bps) US 30-year: 2.407% (+1.6 bps)
According to Themos Fiotakis, a macro strategist at UBS, the recent sell-off is a symptom of central bank noise from around the world, including the European Central Bank’s decision not to extend its bond-buying program after March 2017. News coming out of the Federal Reserve and the Bank of Japan also has fixed-income investors nervous.
Add these factors together, and Fiotakis thinks this could lead to a prolonged sell-off in bond markets – but mostly outside of the US.
“In our estimates, a full back-up of EUR yields towards fair value and a coincident spike of Japanese yields towards early January levels, would push 10-year US yields towards the 1.90-1.95 region (from 1.67% currently),” Fiotakis wrote in a note to clients. “These potential moves are substantial but they should not be seen as a regime change for markets.”
Additionally, the fixed-income strategy team at Deutsche Bank said that recent moves in the market and statements from central banks has caused it to raise its forecast for global yields. It now projects the 10-year to hit 1.75% by the end of 2016 and 2% by the end of 2017.
The Deutsche Bank strategists, however, do not think this signals a huge shift in the bond market. Here are the strategists, from a note to clients:
“Unfortunately, however, we remain skeptical that we are the verge of a major turning point in the multi-year global bond rally. That would require secular increases in productivity that we think will be at best slow to materialize due to demographics and other factors. Rather, we see our new forecast scenario as an upswing driven by changing policy stance within a stubbornly persistent low growth, low inflation, low yield equilibrium.”