Following Friday’s initial post-payroll sell-off, 10-year yields fell 12 basis points from nearly 2.68% to 2.56% late yesterday. Ironically, at the same time, economists were bringing forward their expectations for the timing of a Fed policy rate response to stronger employment growth and firming inflation.
The treasury borrowing schedule is in full swing with the 10-year action today. Foreign buying has been in the spot light recently, in particular speculation that the PBOC has been masking buying through a Euro facility. Ten-year Treasuries yield only 2.57% right now, the lowest pre-auction yield since the June ’13 auction, more than a year ago. Participation at this auction could give strong clues as to the prospects for rates over the second half of the year.
Today’s FOMC meeting is not expected by many to show much surprise. However, if the Fed is to deliver at the July 30 FOMC meeting a revised exit strategy from excess accommodation, we should expect to read in the minutes released today about consensus thinking on some of the major points. Any firming of the exit strategy outline shown in today’s minutes may initially be interpreted (rightly or wrongly) as having bearish connotations.
The fall in Treasury yields since the payroll report on Friday has accompanied some weaker data from Europe. Weaker than expected Industrial Production and exports in Germany, a linchpin for European growth, has pushed bund yields lower, making U.S. securities relatively more attractive. The current 1.35% yield differential between U.S 10-year note and the Bund is as wide as it has been since mid-1999, attracting foreign buying to the States.