The yield of the 10-year U.S. Treasury has tumbled 5.0% since yesterday, to close at 2.09% on Thursday, after the Federal Reserve released the minutes from the July 28-29 Federal Open Market Committee (FOMC) meeting. Surprisingly, bullet notes from the minutes showed up on Bloomberg terminals about 30 minutes before the official release time, 6:00 PM GMT on Wednesday. Bloomberg said, "In the process of preparing embargoed material we inadvertently sent a headline ahead of the embargo,", meaning Bloomberg is taking the blame for the leak.
According to the minutes, “Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,”. No one knows what the statement really means as personal consumption expenditures (PCE) inflation continues to run below the FOMC's longer-run objective of 2%. The Core PCE inflation, which excludes food and energy prices, was 1-1/4 % over the 12 months ending in May, restrained in part by declines in the prices of non-energy imports, said the minutes.
As a matter of fact, the decline in energy prices is not transitory and the renminbi devaluation by the People’s Bank of China (PBoC) will drive the prices of non-energy imports even lower. Thus, a near-term uptick in the PCE and Core PCE are unlikely. The bond market sent the U.S. 2-Year Treasury Note yield tumbling 9.01% to 0.653% at 19:24:49 GMT on Wednesday after the release of the minutes, as traders believed the Fed rate hike could negatively impact the wobbly U.S. and global economies.
In July, the IMF gave a warning to the Federal Reserve, for the second time, that it risks stalling the U.S. economy by raising interest rates too early and called for the central bank to delay a move until 2016.
Since the Federal Reserve committee removed the word "patient" from its March 18 statement, the 10-year U.S. Treasury yield skyrocketed 29.53%, from 1.93% on that day, to 2.5% on June 10 after the release of a strong May jobs report by the U.S. Bureau of Labor Statistics. The yield has been descending since then, as the July and June jobs numbers came in below Wall Street estimates while the April and May numbers were knocked down by big revisions.
The rally in the bond market, starting in the beginning of July, signaled that the Fed rate hike will hurt the U.S. economy, which has been very slow to recover since 2009. The yield spread between the 2-Year and 10-Year Treasury Notes fell to 1.40 percentage points today, the lowest level since the end of April. The gap has shrunk from 1.75 percentage points, when the 10-Year Treasury Note yield hit a high of 2.5% on June 10. Technically, there are near-term supports for the spread between the 2-Year and 10-Year Treasury Note yields at around the 1.35 and 1.19 percentage point levels, if the yield curve continues flattening.
As of August 11, there are 846,066 short positions of 10-year U.S. Treasury Notes, traded on the Chicago Board of Trade (CBOE:TNX), by leveraged funds. This is compared to about 478,375 long positions, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. As the U.S. equity markets are stalling and the U.S. economy looks wobbly, hedge funds were piling into buying the long-term notes last week as there was a net increase of about 53,610 contracts in long positions from the previous week, worth about $5.4 billion, where TNX contracts are traded in units of $100,000 face value.
From our technical viewpoint, the yield of the U.S. 10-year Treasury notes just broke down the 2.23%, or the 50% Fibonacci retracement level and is heading downward to retest the 2.05%, or the 61.8% Fibonacci retracement level. In the event of a breakdown of the symmetrical triangle chart pattern, the near-term support is 1.68%. |