US Yields Move Ahead of GDP

With little excitement in the currency markets O/N, US benchmark yields have backed up a tad ahead of this mornings US GDP report. Treasuries have managed to snap a two-day rally that sent five-year yields to a record low yesterday (+0.75% intraday) as the market expects the report to show that US growth quickened in the last quarter of 2011 (+3% vs. +1.8%, q/q).

Yields along the curve are trading higher for different reasons. The shorter end, out to 5’s, has seen more profit taking by market participants, one day after Bernanke and company pledged to keep short-term interest rates “exceptionally low,” at least until late 2014. At this weeks FOMC meeting, policy makers indicated that they are extending their low rate policy for another 18-months. Currently, futures prices see lower odds of an early 2014 hike, before the meeting it was at +20%. The benchmark yield, 10-year product, trades relatively steady at +1.97%, up from this weeks low print of +1.915% after the Fed announcement and from +2.09% at the end of last week. It’s in the long end that has led the decline, 30-year bonds trade at +3.13% (up +4bps) on bets that the Fed’s decision will spur inflation. Like most initial market moves, price movements seem to get over extended.

A stronger US number this morning should encourage further swapping out of the relative safety of US government debt into more corporate product, where yields and returns are more attractive. The Euro sovereign debt crisis and the threat of a US slowdown combined to give fixed-income a +9.8% return last year (the most in three years). So far this year, treasuries have handed investors a -0.2% loss through yesterday. The Fed’s longer term low policy rate should provide further short term support for equities.

At yesterday’s $29b 7-year auction, the final treasury issue of the week, brought a record low yield, however, it was higher than the market expected, indicating buyers’ reluctance to step in at current levels. The recent run in prices, no matter what is occurring at the Euro debt debate table, US product is a tad rich at current levels despite the Fed’s mandate. The mid-2014 language will help the belly of the curve longer term, however, at these levels, market participants seem to expect stronger data short term to trump current levels.

Other links:
A “Dovish” FOMC

U.S. Ten-Years:

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