Will Treasury Yields Continue Higher?

Oct 26, 2020
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Will Treasury Yields Continue Higher?

While this week brings some heavy hitting reports like the first look at third quarter GDP and September Personal Income and Spending the biggest question will be whether Treasury yields continue to drift higher settling into a slightly higher plane of the well-worn range that we’ve seen since March.  Some technical readings are losing momentum which points to some consolidation of the higher yield drift but just how much is the question? That’s where the election scenarios come in and, of course, developments around the virus and a possible vaccine.  As we sit here today, just over one week  from the election the markets continue to trade like a Democratic Blue Wave is coming. However, we all remember 2016 so it’s not far-fetched to envision election night concludes without a clear-cut winner. That’s the one scenario Wall Street is not betting on so if it happens it will create some volatility with a flight-to-safety trade in Treasuries following until a victor is declared.   We still think 10-year yields remain under 1.00% but if they break above there is plenty of resistance getting to and over 1.25%. Ultimately, the pandemic and the economic headwinds of it will limit any election-inspired volatility and keep yield moves from becoming more dramatic. Plus, the Fed stands ready with unlimited QE to limit rate increases as well.


Treasuries
Treasury Curve Today Week Change
3 Month 0.08% -0.01%
6 Month 0.10% -0.01%
1 Year 0.11% -0.01%
2 Year 0.15% Unch
3 Year 0.19% Unch
5 Year 0.36% +0.02%
10 Year 0.81% +0.04%
30 Year 1.60% +0.04%
Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.22%
6 Mo LIBOR 0.25%
12 Mo LIBOR 0.34%
Swap Rates
3 Year 0.274%
5 Year 0.425%
10 Year 0.840%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Oct 26 New Home Sales MoM Sep 1.3% 1.4% 4.8%
Oct 27 Durable Goods Orders Sep P 0.5% 0.5% 0.5%
Oct 27 Durable Goods Orders Ex Transport Sep P 0.4% 0.3% 0.6%
Oct 27 S&P CoreLogic CS 20-City Home Prices Aug 4.20% YoY 4.20% YoY 3.95% YoY
Oct 27 Conf. Board Consumer Confidence Oct 101.9 102.0 101.8
Oct 29 GDP Annualized QoQ 3Q A 31.8% 31.9% -31.4%
Oct 29 Pending Home Sales MoM Sep 3.0% 3.0% 8.8%
Oct 30 Personal Income Sep 0.3% 0.3% -2.7%
Oct 30 Personal Spending Sep 1.0% 1.0% 1.0%

calendar icon Top 5 Events for the Week

Oct. 26 — 30, 2020

1. Election Outlook and Yields — All Week
2. Third Quarter GDP — Thursday
3. September Personal Income & Spending — Friday   
4. October Consumer Confidence — Tuesday
5. September Housing Data — All Week

 

1.  Election Outlook and Yields — All Week

While this week brings some heavy hitting reports like the first look at third quarter GDP and September Personal Income and Spending the biggest question will be whether Treasury yields continue to drift higher settling into a slightly higher plane of the well-worn range that we’ve seen since March.  Some technical indicators are losing momentum which points to some consolidation of the higher yield drift but just how much is the question? That’s where the election scenarios come in and, of course, developments around the virus and a possible vaccine.  As we sit here today, just over  one week from the election, the markets continue to trade like a Democratic Blue Wave is coming. However, we all remember 2016 so it’s not far-fetched to envision election night concludes without a clear-cut winner. That’s the scenario that Wall Street is not betting on so if it happens it will cause some volatility with a flight-to-safety trade following in Treasuries until a victor is declared.   We still think a 10-year yield remain under 1.00% but if they break above there is plenty of resistance to getting to and above 1.25%. Ultimately, the pandemic and the economic headwinds of it will limit any election-inspired volatility and keep yield moves from becoming more dramatic. Plus, the Fed stands ready with unlimited QE to limit rate increases as well.

 

2.  Third Quarter GDP — Thursday

The first look at third quarter GDP comes on Thursday and a record-breaking 31.9% annualized QoQ gain is expected. That follows a record-breaking loss of –31.4% in the second quarter but at least the gain is expected to recoup most of the second quarter loss. As if to accentuate how important consumer spending is to the economy personal consumption is expected to soar 38.7% versus  a plunge of –33.2% in the second quarter. For the year, the Bloomberg consensus expects GDP to settle at  -4.0%. If that estimate comes to pass it will be the largest annual GDP loss since 1946’s plunge of –11.6% as the WWII war machine economy was switched off.

 

3.  September Personal Income and Spending — Friday

Personal income has declined three out of the last four months but for September the expectation is for a slight but positive increase of 0.3% month-over-month versus a loss of –2.7% in August. Personal spending, meanwhile, is expected to increase 1.0% matching the gain in August. Meanwhile, core PCE, the Fed’s favorite inflation indicator, is expected to rise to 1.7% year-over-year, versus 1.6% in August. It hit a multi-year low of  0.91% in April but has been in rebound mode since then. However, it will still be well below the Fed’s target of 2.0% which seems a long way off at this point. It’s another reason to expect the Fed to remain in ultra-accommodative mode for the next couple years.

 

4.  October Consumer Confidence — Tuesday

With two-thirds of the economy consumption-based, and we see that in the expected GDP numbers above, it’s critical to look at the confidence of said consumer for tells on future spending and hence GDP. While there was a predictable dip at the early stages of the pandemic it never fell to levels of the Great Recession, perhaps due to the stimulus measures and furloughed workers hopes for a quick return to work. For October, confidence is expected to maintain the bounce from September going to 102.0 from 101.8.  Maintaining the bounce from September is notable, but even with that confidence levels are expected to remain well off pre-pandemic highs in the  130’s so maintaining the bounce from September is not in reality that big a move.

 

Conference Board Consumer Confidence

 

5.  September Housing Data — All Week

This week is filled with various housing indicators which should, for the most part, continue to confirm that housing market continues to remain red-hot in September. Today we get New Home Sales for September and the bonus here is that it’s based on contract signings versus closings so it’s a very timely look at that segment of the market. September sales are expected to increase 1.4% and that’s after a 4.8% pop the prior month. The expected 1.025 million annualized sales figure will be the highest since  August 2006 when the housing market was drifting lower from the 1.4 million all-time high in 2005. After that it’s the August S&P CoreLogic CS 20-City Home Price Appreciation print which is expected to show home prices appreciated 4.20% YoY versus 3.95% YoY in July. So home prices continue to increase but at a rather modest rate, unlike in the last housing bubble. September Pending Home Sales follow on Thursday with sales expected to increase 3.0% for the month versus a sizeable pop of 8.8% in August. Again, this report like the new home sales numbers is based on contract signings so they are some of the most current look at the housing market, and while off the sizzling numbers in August, the market still looks to be hitting on all cylinders heading into the final quarter.

 

 


bar graph icon  Yield Universe

 Yield/Duration Relationship 

 

CenterState Disclosure

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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