10-Year Treasury Moves Back Over 3%, Will it Stick This Time?

May 16, 2018

Treasuries were already trading weaker yesterday morning as corporate bond issuance pressured the government market in deal hedging so when solid April retail sales numbers arrived it only added to the selling pressure. As a consequence, the 10-year Treasury yield traded to a new cycle high of 3.09%, easily breeching the prior high from April 25 of 3.03%, and the highest yield in nearly seven years. Despite a bit of a rebound this morning, the bearish price action must be respected, especially with the nearest support now at 3.21% which dates back to 2011 when we last explored this territory.  While Treasuries were back-peddling, the move over 3% knocked equities into the red too as the combination of higher rates and higher oil prices pressured the earnings outlook on stocks.  The move higher in yield remains mostly one driven by technical factors but the decent retail sales numbers added some fundamental underpinnings as well.  As such, we'll stand aside and wait for the selling pressure to subside before taking a stab at any long positions.


  Economic News


As alluded to above, retail sales posted a broad-based advance in April as bigger after-tax paychecks helped compensate Americans for rising fuel costs. Overall sales were up 0.3% matching expectations but off an upwardly revised 0.8% in March. Sales ex-autos and gas increased 0.3% missing the 0.4% forecast and the prior month result.  More importantly, the control group –sales less food services, autos, gas, and building materials– which is a direct input to GDP was up 0.4% matching the forecast and just under an upwardly revised 0.5% in March. The uptick in the March control group number is likely to result in a bump to the next estimate of first quarter GDP from the initially reported 2.3%. The slight month-over-month dip in April, however, is likely to keep second quarter estimates unchanged. That being said, estimates are already fairly robust as is. The Atlanta Fed’s GDPNow model is calling for second quarter GDP to be 4.1% and Bloomberg’s consensus forecast is 2.9%.


Moving onto Fed matters, Richard Clarida was in front of the Senate Banking Committee yesterday as part of his confirmation process for Vice Chairman of the Fed. Clarida is most recently a managing director at PIMCO, and as an economics professor at Columbia University carries the academic chops that should work in concert with Chairman Powell’s more practical experience. In his written testimony to the committee, Clarida said he supports a balanced approach to monetary policy and a healthy respect for financial regulation enacted after 2008-09. The Banking committee was also reportedly sent a letter supporting Clarida’s nomination signed by former Chairman Bernanke and former Vice Chairman Fischer. So, while he’ll likely get some tough questions, his confirmation seems almost assured.


The committee also heard from Michelle Bowman, who was also recently nominated as governor.  She was tapped to fill a seat mandated for a banker or bank regulator, roles she fulfilled as a Vice President at the Farmers and Drovers Bank of Kansas and as Kansas’ top bank regulator. Her written testimony focused on the regulatory burden experienced firsthand as a community bank compliance officer and of the need to reduce the burden on small banks. Assuming both candidates are confirmed President Trump will still have two vacancies on the Board to fill.


Meanwhile, soon-to-be NY Fed president John Williams, in a speech in Minneapolis yesterday was quoted that 3-4 hikes in 2018 is the ’right direction’ for policy.  Moving from the San Fran Fed to New York elevates William’s stature on the FOMC, and gives him a permanent voting slot.  He’s regarded as a serious academic with neutral to slightly hawkish policy leanings.


Finally, while the retail sales numbers were the highlight release of the week, we did get the runner-up release this morning  in housing starts for April. For the month, starts decreased –3.7% month-over-month with an annualized start number of 1.287 million units versus 1.336 million in March. The average over the past year has been 1.241 million so the April result is a slightly above-trend print despite the month-over-month decrease as March was a particularly strong month.


Permits, which aren’t subject to the vagaries of weather which can impact the starts number, decreased slightly to 1.352 million annualized versus 1.377 million the prior month. The average over the past year has been 1.311 million, so like the starts number, an above-average print for April despite a dip versus the prior month.  With higher interest rates, every housing release will be viewed for potential slowdowns but the decreases in April versus the prior month are more to do with outsized gains in March rather than higher rates slowing demand, at least for now.


The slight miss on the housing numbers may have put a little extra bid in Treasuries this morning with the 10-year up 4/32nds in price to yield 3.058%. Part of that trade, however, is likely a partial retracement from yesterday’s move over 3% with just a slight assist from the housing numbers. We’ll need to see more definite signs of slowing in the housing sector than what we have seen so far in order to ascribe the slowdown to higher rates. If the latest move in yields stick, however, it will inevitably work into the mortgage market and that will create another headwind for the marginal buyer.



Market Update  2018 FOMC Members: Voting Status & Policy Stance


The composition of the FOMC has shifted with recent appointments and changes in voting members from the ranks of regional Fed presidents. The chart is provided by BMO Capital Markets and it tries to define the policy outlook of the current slate of voters (in bold) and other non-voting members. With Richard Clarida and Michelle Bowman awaiting final confirmation, only two Board slots will remain vacant. In any event, the 2018 FOMC voting contingent has taken a definite hawkish tilt, and that, as much as anything else, may give us clues as to whether the Fed engineers three or four hikes this year.

2018 FOMC Members: Voting Status & Policy Stance



Agency Indications Agency Indications — FNMA / FHLMC Callable Rates


Agency Indications — FNMA / FHLMC Callable Rates



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