U.S. yields stuck on policy path?

We are reminded this morning that U.S. 30-year yields head for the longest monthly decline since 2006. Looking back is wonderful reflection, but we take our future paychecks from events yet to unfold. Bond yields have fallen for 5 months in a row, just as they had in 2006. The period of 5 months (June-November ’06) coincides with the termination of the Fed’s "measured pace" removal of accommodation ended at the June ’06 FOMC meeting.
 
In this more recent instance, the Fed began reducing incremental additional stimulus in securities purchases 5 months ago in January. While the Fed has continued to provide extraordinary support with policy rates near zero and continued, if diminished, levels of securities purchases, the direction of monetary policy has been toward normalization.


Similar to the 2006 period, market participants have a sense that they understand where the Fed is headed with policy over the coming year. Back in mid-2006, the Fed, having ended measured pace hikes gave indication there was no interest in changing policy for the foreseeable future. Similarly, policy intent was rather explicit at the December ’13 FOMC meeting, giving rise to strong market consensus expectation for a policy-path, measured-step tapering.
 
Interesting, U.S. 30-Year Yields ebbed to 4.55% at the end of November 2006, having fallen for 5 months straight by a total of 70 bps. However, over the following 2 months, yields recovered over 40 bps, recovering more than half of the prior 5 month yield decline in short order.
 
Right now U.S. 30-Year yields are at 3.35%, having fallen from a Dec high of 3.83%. Using ’06 as our guide, we might expect to retrace half of the Dec-May decline over the next two months. That would put 30-year yields at 3.6% (USU4 futures roughly 134-16).
 
A quick look at the rolling 9th Eurodollar future contract, currently EDM6 indicates a potential move of 65 bps. (see chart) EDM6 is now 98.61. For guide, USU4 134-135 put spread is 19-20 (ref fut 137-06) and Grn Sep mid-curve 97.75 98.25 put spread is 11/11.5 (ref fut 98.365).

 
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