Thursday, May 7, 2015

Why Are Bonds Taking a Dive? (excerpt)

US bond yields have jumped recently. The 10-year Treasury is up from a recent low of 1.87% on April 17 to 2.26% yesterday. Everyone is blaming that development on the spike in Eurozone bond yields, particularly the surge in the 10-year German government yield from its all-time low of 0.033% on April 17 to 0.58% yesterday. That’s despite the implementation of QE by the ECB starting on March 9.

With the benefit of hindsight, the backup in yields isn’t a surprise. Yields simply fell too low at the start of the year on fears that plunging oil prices might trigger widespread deflation, especially in the Eurozone, and maybe cause another financial crisis if oil companies started to default on their debts. Now that oil prices have rebounded, those concerns are evaporating and yields are normalizing. I think it’s that simple.

In any event, the backup in bond yields is doing the same to mortgage rates in the US. That could stall the already lackluster recovery in the housing industry, which might explain why lumber prices are falling. So maybe the Fed should postpone its lift-off given the lift-off in bond yields?

Today's Morning Briefing: Bonds Away? (1) Confused Fed heads. (2) More on the dark side than the light side. (3) Our collective conundrum. (4) A simple explanation why bond yields have surged. (5) Are bond traders expecting Fed lift-off, while forex players aren’t? (6) Wages might finally be rising faster, but gasoline prices are rising rapidly too. (7) Stocks, bonds, and currencies could be choppy through the summer. (8) FOMC members expecting much better growth may be disappointed. (9) ADP payrolls especially weak for large goods-producing companies. (10) Oil and dollar hitting capital spending on construction and industrial machinery. (11) Focus on overweight-rated S&P 500 Financials. (More for subscribers.)

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