Mind The Gap

By | June 6, 2017

Monday, the 10-year Treasury Bond (10YT) dropped to 2.175, the lowest point in almost 6 months, marking an important milestone as the 10YT now hovers in ‘the gap’ between 2.15 and 2.17.

As the graph below illustrates, after the November election, the 10YT skyrocketed above 2.15 and we haven’t seen a return below those levels in the months since. A rally in April landed us close to breaking the gap but ultimately failed to do so before the 10YT began trending sharply upward again. This week however should bring a second attempt for the 10YT to edge below the gap into pre-election territory.

 

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To understand how we arrived at this point we must first understand the events that precipitated the initial rally and attempt to break the 2.15 threshold as many of these events continue to be at play in setting the 10YT on its current downward trend.

Most notably the mid-March to mid-April rally was caused by investors seeking a safe haven for their investments following headlines relating to:

  1. North Korean nuclear threats against South Korea and the United States.
  2. Geopolitical speculation on Russian involvement in the Syrian gas attacks.
  3. The French election.
  4. Comments by Trump on April 12th that the U.S. dollar was “too strong”, implying the Trump administration would institute a policy to promote a weaker dollar and depress rates.
  5. News that British Prime Minister Theresa May wanted to hold a general election in June, much sooner than initially anticipated.

By mid-April, the flow of market moving news had somewhat ebbed, the 10YT had failed to move below 2.15, and rates began to creep back up. Between mid-April and May 17th, the 10YT seemed to be creeping back of its own volition, relatively unaffected by events at large. May 17th however marked the beginning of the current rally and descent to current loans. It was on this day that news surrounding communications between Trump and former FBI Director, James Comey, began breaking.

Speculation as to whether the details of these communications could or would be used by a House Oversight Committee began driving markets by casting doubt on the administration’s fiscal policy and ability to enact legislation that investors were counting on when they bet big on the stock market immediately following the November election. As a result, the 10YT began trending downward as investors sought safety in the bond market. Weaker than expected employment data on June 2nd continued to push the 10YT lower, and we find ourselves watching the 10YT around the 2.175 mark.

There is much speculation that bonds have continued to trade well into this week in anticipation of Comey’s testimony on Thursday. If Thursday ends up being a historic event or should Comey deliver any bombshells, mortgage rates could easily decline, with the 10YT falling below ‘the gap’. Conversely, if Comey’s testimony is anticlimactic, rates could rise very quickly (remember mortgage rates track the 10YT). Barring any dramatic events surrounding the Comey testimony, the biggest hindrance to the 10YT dipping below 2.15 and pre-election levels will be next week’s Fed meeting. Many analysts are suggesting that bonds won’t dip lower until there is further clarification on Fed policy and the direction the Fed is looking to go, which should come after next week’s meeting.

The next few days will certainly be interesting and it will be important for investors to keep a close eye on political events as an indicator of market movement and to be mindful of whether we dip below ‘the gap’.

 

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