Decline in Treasury Yield May Escalate as Risk Aversion Continues

Published August 27th, 2009 - 07:13 GMT

Treasury yields are likely to decline for the third week as the 10-year note strengthens on increased risk aversion in global markets. Equities may be forming a top that continues to take shape with today's one percent drop in the US. Globally, European stocks closed down along with greater than one percent declines in the Nikkei225 and Hang Seng indices. Oil continues to drop with the commodity falling from resistance at $75 to under $70 per barrel for the first time in seven sessions of trading. Meanwhile, currencies are showing significant strength in the Japanese yen, along with improvement in the dollar saw initial gains as the greenback appears poised for further gains. Data this morning proved mixed as European retail PMI shows contraction for the 15th month while German confidence rose along with the highest monthly gain in U.K. house prices in more than two years. US economic releases were expected to remain grim, with second quarter GDP expected to post a larger 1.5% decline following an initial one percent estimate. The release beat projections as the figure remained consistent with previous estimates, while consumption declined less than previously stated. Initial jobless claims came in slighter better, but were overlooked as the week prior saw a small upward revision. Ultimately, investors remain concerned over the safety of growth in the quarters ahead. With unemployment continuing to rise, and not abating sharply at that, loss rates on safer housing loans and credit cards threaten to keep lending suppressed at financial institutions. Echoing the risk, a quarterly report by the FDIC showed that the agency added 111 lenders to its "problem list," now 416 lenders high. Assets at the institutions total nearly $300 billion, a scale comparable to that of Washington Mutual (formerly the largest savings & loan bank) when it was seized in September, 2008.

US 10-Year Treasury Yield Chart

The 10-year treasury has seen considerable volatility in recent weeks as it has shifted in a wedge since May. Despite an uptrend since the start of the year, the bond may be due to decline, facing initial resistance at the early July bottom, with an eventual move that could take the yield to just above three percent. Uplifting economic data has failed to result in a tandem move lower for the treasury note, while projections of a large budget gap for many years has not caused investors to demand a higher return for the risk. At the same time, a recent report by the Congressional Budget Office showed this year's deficit may be 1.58 trillion, smaller than the 1.825 trillion estimated in June. Looking at the benchmark bond in a larger time frame, the note has bounced off the 61.8% retracement of the move from June 2007 to the peak set in 2008. Having also surpassed the 50% level at 117-15, the note may head back towards 121, where significant resistance may be found.

US 10-Year Note Long-Term Chart


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