Bond Trading Desk: "These Are The 2 Best Questions We Got On Today's 10Y Treasury Move"
For the past two days (and weeks, and months) the investing world was obsessed with just one thing: will the 10-Year yield break 3.00%, and what will happen to both Treasurys and stocks, immediately after. It did so today, briefly touching 3.001%, before retracing most of the move, only to close just below 3.00%.
Meanwhile, stocks tumbled, even if the slide was due to an largely unrelated combination of weakness in the new (Google) and old (Caterpillar) economy.
Still, as BMO's Ian Lyngen and Aaron Kohli write, "achieving 3.0% 10-year yields is a big deal, until it isn’t." Here's why the response from the two fixed income strategists was nothing more than a yawn to today's events.
Today we saw 10s reach 3.001% intraday, for the sector’s highest yield since January 2014… yawn. We’re not disinterested per se, but the long-awaited three-handle was summarily rejected as equities sharply declined.
What happened next is more interesting, and as the duo writes, "when a milestone such as this is reached, we often field a variety of inquiries and today we received two questions that were rather spot-on."
Here are the two questions:
"First, is this a breach or a rejection?"
While our opening few lines show where we come down on the matter, it warrants an explanation of our interpretation of the difference. If the run-up in yields was accompanied by 10s closing above 3.0%, that would have been a breach or a breakout by any classic technical definition. Although in such a case a weekly close would be far more compelling than simply a daily one. In fact, a couple days above 3.0% that were subsequently reversed would be almost as constructive as the rejection seen today. Nonetheless, with risk assets once again in negative territory year-to-date, we struggle with any narrative that suggests the next move is a clear shot to 3.25%.
"The second question which we found notable was ‘why do 3.0% 10-year yields matter anyway?" First, here is the answer in the context of the broader, "consumption" economy.
Admittedly, there is a lot of wood-to-chop here, as they say. To be fair, there is little difference between 2.99% and 3.01% - just 2 bp in fact. However the signal the market is taking from the selloff is key, as is the implied path for future rates which becomes more uncertain when a range is broken. A bearish breakout intuitively implies higher yields, although as we can see in the response of risk assets, there is also the negative impact on the real economy to consider. The consumer will be (and has been) facing elevated borrowing costs as well in the form of mortgage rates, consumer loans, etc. – which eats into wallet-share; a particularly troubling development for an economy that is ~70% consumption.