Monday, February 23, 2015

Why Have Bond Yields Rebounded? (excerpt)

The 10-year Treasury bond yield is up from this year’s low of 1.68% on February 2 to 2.13% on Friday. It started the year at 2.17%. What happened to trigger such a fast and nasty reversal? Here is a partial list:

(1) Payroll employment data were released on February 6, showing not only another solid gain in January payrolls but also big upward revisions to the previous two months. The federal funds futures market immediately discounted a Fed rate hike around midyear and another by the end of the year. The FOMC minutes cited above seemed relatively dovish, as I discussed last week, but the meeting occurred the week before January’s robust data were released. Subsequently, several Fed officials have said that they favor starting liftoff at midyear.

(2) German yields fell early this year on weaker-than-expected new orders data for November, released on January 8. This year, the German 10-year yield fell to a record low of 0.31% on January 30 in response to mounting fears of a Grexit and the worsening of the Ukraine crisis, along with deflationary CPI readings and anticipation of QE.

However, on February 5, we learned that December factory orders rose 4.2% m/m, led by a 4.8% increase in foreign orders. This augurs well for exports, which rose to a record high during December. Eight days later, Germany’s latest real GDP release showed a gain of 2.8% (saar) during Q4-2014. On Friday, Markit reported that the Eurozone’s Composite Output PMI rose from 53.5 during January to 54.3 during February, the highest in seven months. The German bond yield is now back up to 0.36%.

(3) Japanese yields also have risen recently on better-than-expected economic data, and expectations of more to come. The 10-year government yield fell to a record low of 0.21% on January 19. Real GDP rose 2.2% (saar) during Q4-2014, according to the February 15 release. On February 18, we learned that exports rose 1.8% m/m and 17.0% y/y during January. The 10-year bond yield is now up to 0.37%.

Today's Morning Briefing: Bad Jokes. (1) Bag of monetary tricks. (2) Two-handed economists tend to be data dependent. (3) On the third hand: Market dependence. (4) Financial stability is another concern of the FOMC. (5) Forward guidance: Thanks, but no thanks. (6) Did ECB corner itself into QE? (7) Eight reasons why bond yields have risen this month. (8) Currency depreciations lifting German and Japanese exports. (9) Foreign bond buying in US surprisingly weak. (10) Keep the euro, pass the ouzo. (11) Yellen likely to sprinkle more fairy dust this week. (12) Is Yellen still short Biotech and Internet stocks? (More for subscribers.)

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