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Trader: The Flattening Yield Curve Story Is Just Starting

Courtesy of ZeroHedge. View original post here.

By David Finnerty, a global macro commentator for Bloomberg

Flattening U.S. Yield Curve Story Ain’t Over Yet: Macro View

The rise of U.S. 10-yields above 3% may be the talk of the town this week, but that doesn’t mean yield-curve flattening is finished. U.S. economic data due Friday may bring it right back to center-stage.

Surging commodity prices helped drive the 10-year rate’s ascent, but there are also other supports for higher yields.

The U.S. deficit is forecast to balloon to $1 trillion by 2020, two years earlier than previously forecast, says the Congressional Budget Office. The prices paid component of the Institute of Supply Management advanced in March to its highest level since April 2011, wages are steadily rising, and let’s not forget U.S. inflation reached 2.4% in March, its strongest level in a year.

The catch is these same reasons are also helping to spur the 2- year yield higher, as markets factor in tighter Fed policy. There appears room for 2-year yields to edge higher, with four rate hikes this year left as a possibility after the Fed’s March meeting.

Whether 10-year yields can keep rising near-term is more debatable. A breach of the 3.05% January 2014 high remains elusive. There’s still scope for a decline in the short-term.

U.S. first quarter data due Friday is expected to show GDP growth fell to 2% from 2.9%, while measures for core personal consumption expenditure and employment costs gained.

Slowing growth amid rising cost pressures isn’t an optimum economic scenario. If that inspires an equity selloff, expect longer-term bonds to be the main beneficiary.

There’s also the real risk that rising longer-term yields alone will spur an equity selloff, driving money back into bonds; February being a case in point.

Trade war fears between U.S. and China appear to have been put on the back burner for the moment, but that doesn’t mean they’ve disappeared. Given China’s initial response to U.S. tariffs, it’s unlikely President Xi will easily cave in.

Trump said this week if the two sides can’t reach agreement the proposed U.S. tariffs on billions of dollars in Chinese goods will take effect as planned. Treasuries would feel some investor love if that happened.

So while the rise above 3% makes for captivating headlines, it doesn’t mean the bear flattening yield curve should be forgotten.


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