Perspective: 10-year Treasury Note Rises Above 3%

December 27, 2013 05:58 AM

via a special arrangement with Informa Economics, Inc.

Japan data and Abenomics

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

The 10-year U.S. Treasury note traded at 3.005 percent during Thursday's trading day before prices rose slightly to send the yield back under that level. The closing mark of 2.997 percent was still the highest since July 2011, and that is also the last time the 10-year note yield finished above the 3 percent barrier.

Still, there may not be as much concern as there was previously about eclipsing 3 percent as it took place this time with the Fed’s tapering plans now a known quantity. This underscores that rising interest rates are likely to continue as the Fed winds down its stimulus efforts and the US economy gains traction.

This rise in rates won’t produce the worry it did earlier this year when the economy was still struggling more than data suggests it is now.

Note the following chart which shows the rise to 3 percent in September that was quickly doused by a combination of Fed statements and US economic data that pushed the yield back lower. One of the catalysts was the continued Fed insistence that the stimulus efforts were still in place.

10-year US Treasury Note Yield in 2013

Chart: Wall Street Journal

The 10-year note yield is a benchmark for all types of interest rate securities ranging from mortgages to corporate bonds, and highly influences the cost of fixed rate housing loans for American homeowners.

Comments: Higher market interest rates are expected in 2014 as the economy strengthens and the Fed is seen steadily winding down its quantitative easing policy. The risk, however, is that rising long-term yields slow the economy in the coming months.

Many Wall Street strategists expect it will reach 3.50 percent or higher in the coming months. The bond market is not pricing in aggressive rate hikes. The December 2015 federal funds contract currently suggests the central bank’s overnight borrowing rate will be around 0.75 percent at that date, well shy of its 1.50 percent peak seen as recently as September when the market believed that a taper would be followed by a rapid pace of monetary policy being tightened.

Further, updated forecasts from Fed officials indicate that the Fed funds rate increase is not going to happen until 2015. Only two members of the Fed expect there to be a rise in the Fed funds rate in 2014 with all but three seeing that happen in 2015. The expectation then is for rates to be 1 percent or below on the Fed funds rate by all but five Fed members.

Japan data shows gains from ‘Abenomics.’ Japan November core inflation rose to a five-year high in November, increasing to 1.2 percent from 0.9 percent in October and topping consensus of 1.1 percent. This marked the first mark over 1 percent in five years. The "core" CPI (minus food and energy) rose 0.6 percent after a 0.3 percent gain in October. That was the biggest gain in 15 years.

Crucially for Japan's fight against deflation, total cash wages rose for the first time in five months with an increase of 0.5 percent.

Meanwhile, other data appears to show that Japan's economy is improving. Industrial production rose 5 percent on year in November, although that was down from 5.4 percent a month earlier. Retail sales climbed 4 percent vs 2.3 percent and unemployment held steady at 4 percent, but overall household spending rose just 0.2 percent vs +0.9 percent in October and consensus of +1.7 percent.

Bottom line: Japan is still moving forward. But some of the gains now in the data could be action by consumers to step up their purchases before an increase in the country’s sales tax takes effect in April. Already the government has put stimulus plans in place to help offset the negative impact a tax increase is expected to have on the fragile Japanese economy. The data will become even more important as that tax rise approaches and then the key will be whether the numbers echo fears that the tax increase will negatively impact the Japanese economy.


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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