Treasury Yields Drop

Today’s new 10 year bond issue auction of $21 billion went very well, the 10 year yield dropped to 2.04% today before settling at about 2.09%. Long Treasury yields are being pushed lower by markets regardless of Fed actions. The main factors include: (1) Fed Beige Book release today indicating flat wage growth (declaring the uptick in October and November as “not sustainable”), weakening manufacturing due to the strong dollar’s negative impact on demand, and energy sector struggling. Note that real wage inflation (a closely watched inflation gauge and stated Fed goal) was only reported in the New York and San Francisco districts, with the remaining 10 districts reporting virtually no wage growth; (2) Oil prices continue their dramatic fall on weakening global demand, briefly falling below $30 per barrel today, the lowest since 2004. Not only is this a harbinger of global demand, but this contributes to the “risk off” trade as the energy sector (which is a huge player in the bond markets) will be seeing more defaults if prices don’t stabilize soon; (3) China currency and stock market volatility, which is roiling markets as confidence erodes in the Chinese authorities’ ability to “control” the markets; (4) Other central banks (the latest being Canada) continuing to lower their borrowing rates. All of this is contributing to a consensus that the Fed schedule of rate increases will be slower than announced.    stay tuned    David R. Pascale, Jr.