Archive - Apr 27, 2014

More stimulus is coming and when combined with rising wages, it should push inflation higher. But this risks a bond market rout.

Next week marks the beginning of May and the potential for a regime change in US Treasuries. As BofAML's Macneil Curry notes, historically the month of May coincides with a jump in Treasury volatility. A seasonal analysis of implied Treasury volatility using the MOVE Index (Merrill Option Volatility Estimate) shows that May is traditionally the second strongest monthly of the year after December. With the MOVE Index also showing signs of basing, and 10yr Treasury yields stuck in an increasingly unsustainable narrow range, this May is unlikely to disappoint. While the long term trend for US 10s suggests that Treasury yields should climb higher, in the near term we prefer to take a wait and see approach, watching for a break of the range extremes at 2.825% and 2.591%.

"YELLEN. The strong incoming data on spending eased my fears that we are in or are approaching a recession regime." Janet Yellen's comment above, from June 2008, sounds no different than what is being said right now. What looked like "drags" on tepid growth trajectories was, at that moment, something worse – and would only grow far, far more destructive further on.

Although investors are wondering where the markets are headed, there is one question that is captivating the entire industry.