By Roger J Kerr
US 10-year Government Treasury bond yields have retreated sharply from 2.30% a couple of weeks ago to 2.05% today on the back of the weaker than expected US employment numbers released last Friday.
During the month of March 120,000 new jobs were started in the US against a prior consensus forecast of +205,000.
The rally back down to 2.05% in the US bond yields is unsustainable in my view.
Over the past 12 months the monthly jobs figures have been subsequently revised upwards by +41,000, on average.
The claims for the dole in the US have reduced sharply over recent months, suggesting the strong employment growth we have witnessed in recent months will continue and the lower than expected March figure has not changed that overall trend.
The bond market therefore has over-reacted in pushing yields down so much in my opinion. Our 10-year swap rates track US long term interest rates and as the chart below shows, the push-down in US yields has reversed our 10-year swap rates from 4.60% to 4.40%.
Corporate borrowers must be using this opportunity of the pull-back to extend existing swaps for longer terns or enter forward start swaps.
The 10-year swap rate has remained below the downtrend line since the highs of 8.00% in early 2008; however a move above 4.75% over coming months would cause a break above that long-term downtrend line.
My view is that global fixed interest fund managers will be using this opportunity of lower market US bond yields to switch their portfolio durations from long of benchmark to short of benchmark - that is, sellers of bonds at 2.05% which will force yields upwards from here.
Provided Spain does not blow up and cause a rush for safe-haven buying of US bonds, the building probability (based on stronger US economic data) is that US bond yields recommence their upward trend and we go with them.
The resistance at 4.75% in our 10-year swap rates then becomes under threat.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
3 Comments
Roger has been tellign people to fix for 3 years and chart tells me thats worked (not!). Seems to imply a strong downtrend to me.
With cash rate projected to stay at 2.50% into 2013 floating still seems attractive ..I suppose if you cal the bottom often enough you will be right one day and Roger has sure called the bottom alot !
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