The growing series of stronger than expected economic reports, now including yesterday’s retail sales, may be having an influence finally. Five-year Treasuries yields are rebounding from a 1-month low reached on Friday at 1.57%. Overnight we hear of a seller of 6,000 FVM4 (June 5-year) 120 120.5 call spreads. The Treasury 5-30 yield spread is also flattening again.
The Treasury 5-30 yield spread reached from a March 28 low under 180 to 195 last Wednesday. One of the enclosures sent shows a small head and shoulders bottom that met its objective near 195. This was in line with our expectations for resistance and an inability for this yield spread to push back through the low 200’s.
Again, we see 5-year Treasuries as the driver of this yield spread at this juncture. Our confidence has increased that time remaining at zero interest rate policy is a declining fraction of the time remaining for current 5’s. Growing expectations for above trend growth in H2 will pressure 5-year treasury and test the standing rhetoric from Fed officials that the trajectory for the path of policy rates post lift-off will be shallow. Treasury 5-30 yield spread is expected to trade 120 before Q1 end '15.