U.S Treasury Notes Tick Lower As Markets Brace for Higher U.S Rates

U.S. government bonds fell further on Monday, sending yields to their highest levels since late June amid concerns that major central banks in Europe and Japan are reaching the limits of policy easing measures, and mounting speculation over this month’s rate hike by the U.S Federal Reserve.

The bond market resumed its selloff on Thursday after the policy meeting of the European Central Bank when it disappointed investors by not extending the asset purchase program in which it is buying €80 billion worth of bonds a month, beyond the March 2017 end-date. Lower demand dampened bond prices and drove yields higher in return.

Consequently, Treasuries no longer appear as attractive to foreign investors compared to local currency bonds as they did earlier this year, as the spike in other government bond yields has wiped out the “yield pick-up”. This is the amount foreign investors expect to earn when they sell local government bonds in their respective countries to invest the proceeds into buying 10-year U.S. Treasuries.

Topping up the selling pressure were hawkish comments from the Federal Reserve Bank of Boston President Eric Rosengren, a Fed Member widely considered to be a dove. In a speech delivered on Friday, Rosengren discussed the risks of waiting too long to raise interest rates as the labor market has been near or at full employment, while inflation is slowly returning towards the central bank’s 2% target.

Another Fed governor who has maintained a dovish stance on monetary policy will be  speaking later on Monday. Lael Brainard has generally been advocating maintaining low rates in the current economic climate, and will round up the appearances by U.S. central bankers until they gather for the FOMC meeting on September 21 in Washington.

Therefore, if a different argument, or hints of a change in opinion are delivered tonight, the possibility of a rate hike this month will shoot up, and in turn, pave the way for a further rise in bond yields. The Treasury Department is scheduled to auction the benchmark 10-year notes before Ms. Brainard’s speech. The uptake from the auction combined with the effects of the speech could magnify the volatility in the 10-year notes.

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Fig: US 10-year treasuries

The 10 year T-notes have been on a slide since early June. The price once again fell below the 38.2% retracement level after a spike last week. With the downward pressure which being cast by the two moving averages placed above the price action, U.S 10-year treasury prices are anticipated to continue the downtrend and may retest the 50% fibonacci retracement level.

Trade suggestion

Sell Stop at 130.20, Take profit 129.90, Stop loss at 130.50

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