Wednesday, September 23, 2015
The U.S. Treasury Yield curve has flattened the past 12 months with the 2-year/10-year yield curve falling by 57 basis points to 1.45%. While the curve is still positively sloped, a flattening of the curve is not a positive sign for the economy as historically recessions have occurred once the curve becomes inverted i.e. short-term rates are higher than long-term rates. On the very short-end of the curve, the recent auction of 30 day T-bills drew a yield of 0.00% which means that investors will willing to lend the U.S. Treasury funds for no return interest. Even more interesting is the fact that some existing T-bills have fallen to a slightly negative interest rate, which makes lending at zero seem like a "good deal".
While the voting members of the Federal Open Market Committee (FOMC), once again, delayed a move to hike the Fed Funds interest rate at their September meeting on a 9 to 1 vote, it is a bit ironic that several Fed officials have commented the past few days following the FOMC decision that they believe that a rate hike is still a possibility by the end of the year. This poses a question that I have yet to hear a good answer to, that is, what does the Fed expect to see in the next 3 or so months that they are not seeing now that will warrant an interest rate hike by December? Some reasons cited for the Fed inaction in September were growth concerns in China, global market volatility and inflation rates not meeting the Fed "target of 2%. I am not sure anyone really truly knows what the "real" economic growth figures are for China, as "official data" has generally been viewed as suspect. It will certainly take more than a few months to make any structural changes in China despite Chinese government's attempts to micromanage a smooth transition to a domestic based consumption economy. As for inflation concerns, commodity prices have certainly been in a slump, tied not only to slower demand from China, but also from a strengthening U.S. Dollar. If the Fed does raise interest rates, it could trigger a move towards additional Dollar buying which could in theory further suppress inflation. Finally, markets do not like uncertainty and it seems that the Fed is creating more uncertainty by holding back on raising rates, even a token 25 basis points, due to economic concerns but then have Fed officials talk up a rate hike shortly after the interest rate decision. If the Fed truly intends to raise rates at some point in 2015, it may behoove them to act sooner than later and remove the uncertainty from the market, which may ultimately help to curtail some of the price volatility we are seeing in the markets today.
Given the seemingly random intra-day market volatility we have seen the past few weeks, I thought it was time to step back and take a longer-term view on how markets are performing and filtering out some of the "noise" we have been experiencing in this era of high frequency and algorithmic trading. So today we are looking at the monthly continuation chart for 10-year Note futures. Here we notice that despite all the analysts' calls for interest rates to move higher, the market continued its overall bullish trend that began back in the 1980's, which is before many of these "prognosticators" were even born. For the front-month futures, we would need to see prices fall below 112-00, from its current 128 handle to "unofficially" call the end of this historic bull market move. While the "near-term" trend that began back in 2008 is showing a market that is in a consolidation phase, we do note that prices still remain above the 100-month moving average, and we are seeing prices making a series of higher lows since September 2013. Momentum, as measured by the 14-month RSI, is neutral with a current reading of 51.55. Support is seen at the September 2013 low at 122-07, with resistance found at the January 2015 high of 131-05.5.
Mike Zarembski, Senior Commodity Analyst