August 14. Bond yields jump
–Yields jumped yesterday with tens up over 11 bps to 2.714. While 5’s and tens are still below high yield marks set on the July employment report (tens had gotten to 2.74), 30 yr bonds did equal that high at 3.755 (up 9 bps yesterday). A paper from the SF Fed suggests that QE provided only a modest boost to the economy, estimating an increase of just 0.13 to GDP after QE2, and that forward guidance is essential to favorable results. However, a shift in Fed stance to reliance on forward guidance as its main policy tool seems to create risk of a much steeper curve, as positive carry over the longer term becomes less certain. 2/10 rose yesterday by 8.5 bps to 238.5, just 1bp shy of this year’s high. Of course better economic data is also a factor in rising long end yields, and news in the EU has improved as both France and Germany beat Q2 growth estimates with rates of +0.5 and +0.7. The Fed wants to avoid a yield surge like the one in 1994 that precipitated global financial crises, but with the possibility of another debt ceiling battle as the Fed begins to taper, that risk increases. Next target in tens is around 2.90, a 38% retrace from 2007 high of 5.30 to 2012 low of 1.40 (around 123 1/4 in TYZ). TYV 122/123/124p fly settled 6/64 yesterday.
–Reds/greens steepened most yesterday, +6.25, while green/blue gained 5.75 and blue/gold +2.75.
–Today’s news includes PPI expected +0.3 with Core +0.2.
