Quick Word On 10 Year Yields
Submitted by Nic Lenoir of ICAP
10Y yields are challenging an important resistance this morning just below 3.50. We expected to drop to 117-24/28 overnight, but it seems the Financial Times article about a change in language by the fed put pressure on markets overnight. I personally feel that the article was more one person's wishful opinion more than anything else. If those words came out of the mouth of a Fed official it would be a different story. However the preson putting the story out is one of the best informed financial journalist when it comes to the Fed. Most people agree that this is a theme for early 2010, so maybe it's a way for the author to position first on the story and have a right to claim when it happens. Certainly a change of language is something easier to do for officials considering the mess that resulted from the reverse repo dry run. According to Lou Crandall, our chief economist, this is a topic for early 2010, but he thinks that a change in language could well be the first action by the Fed in the process of moving towards normalizing rates.
Technically we were hoping another bounce before breaking. As can be seen on the 30 minute chart indicators are pretty oversold, a retracement towards 117-24/118 on the day seems very likely, and we would argue for the possibility to see 118-08 before really moving higher in yields. In terms of price action it just happens that we pushed a little too low right off the bat without consolidating enough on the short-term indicators to have enough strength to keep carrying this move. We also think that stocks should they test 1,098/1,004.3 are likely to experience another quck and sharp sell-off which will probably put a bid at least temporarily on treasuries.