Feb 9. Treasury yields (and commodities) surge
–Interest rates surged Tuesday, with ten yr note up 8 bps to 3.72%. (10 yr auction today). All near euro$ one-yr calendar spreads made new highs, with the peak now EDZ11/Z12 at 139. Last year in April tens hit 4% which capped the yield rise. At that time the third eurodollar contract traded around 99.10 (in comparison to EDU1 currently 99.39). The 4th contract had a spike low to 98.65. Highest one-yr spd was around 155. Ultimately of course, the Fed stood pat and eurodollars recovered, though it took a few weeks.
–In the current environment the market is convinced that higher yields at the long end won’t create conditions for a FF hike. However, many commodities made new highs with silver up nearly $1. March cotton and copper both posted new high settlements. Corn, wheat, beans, rice all indicating higher prices. It’s almost as if the rate hike in China was a green light to buy commodities. Also (Breitbart) “China is building up strategic reserves of rare earth metals in a move that could give it better control over the resource so indispensable to high tech products, the WSJ reported.”
–In the US, there is a shift against further accommodation, both monetary and fiscal, evidenced by several items yesterday. Lacker and Fisher both indicated opposition to further QE. Budget rhetoric is heating up, with the House possibly voting next week to block funding for Obamacare, and cut other spending. There is a proposal to begin raising the costs associated with FHA backed mortgages in order to reduce federal support of home financing to less than 50% (Reuters). Also from Reuters, ” U.S. cities and counties are getting ready to fight for federal grants they say keep local economies strong and residents employed, after President Barack Obama signaled he is open to cutting them.” While the hand-off from public to private support for the economy is welcome, there are still major headwinds in terms of housing and municipal finance that indicate a slowdown in the second half of the year.
