Treasury Yields Spike on Perfect Storm of Data, Euro Actions, Speculation and Expectations

The 10 year T yield is at 2.44%, having broken though a “key technical” barrier of about 2.42%. This is a 7 month high, back to nearly the peak of the post election “reflation trade.” Why? (1) Data: The US Economy has shown strength as recent housing sales and durable goods orders have outpaced expectations; (2) Fed Chair speculation: continuing rumors putting John Taylor in the Chair for 2018 are spooking the bond market. This week’s report that an influential group of lawmakers are pushing for his nomination is definitely causing a selling in bonds. Note that Yellen led Fed’s “neutral rate” is 2.75%, while Taylor’s is estimated at 3.75-4.00% (note that the “neutral rate” is the appropriate overnight rate for this macro-economic cycle, today the rate is 1.25% with gradual rate increases expected). Bond bulls are hoping for Powell or Yellen, as many believe that some top economic advisors are warning that equities could see a big sell off on a Taylor nomination. The consensus is that the decision could come this week; (3) Euro “taper” – the ECB’s big announcement this week is expected to be continued tapering of bond purchases, with an end date of approx. Sept 2018. This is important as the ultra low German 10 year bund rate has been keeping US Treasury yields low as a “relative value” trade; (4) Fiscal Policy expectations – Congress and the Administration are inching closer to passing tax reform/tax cuts, but the details have not been announced. However, the procedural hurdle clearing and the continued dialogue is stoking expectations that some stimulative and deficit growing legislation is in the offing. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners