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11 Dec 2014
Fed expectations driving front end rates higher – RBS
FXStreet (Barcelona) - William O’Donnell, Head of US Treasury Strategy at RBS, notes that Fed expectations are driving front end rates higher while differentials drive the back-end end yields, further adding that falling inflation expectations in EU and US were aiding lower long end yields.
Key Quotes
“There has been an unmistakable regime shift in the Treasury yield curve that should lead to some good trading opportunities for tactical curve traders. In recent years the 2yr yield has anchored the Treasury curve with the curve pivoting steeper in sell-offs and flatter in rallies-all around a relatively static front end. Well today we can see that rate trends in both ends of the curve have diverged with 2yr yields trading near the highest levels since the spring of 2011 while 30yr yields trade near the lowest yields (excluding October's flash crash) since the beginning of the so-called taper tantrum in May 2013.”
“I don't think you need to be a rocket scientist to figure out what's going on: Fed expectations are driving front end rates higher while back-end yields are being driven by differentials and the outperformance in like maturities in Germany, the UK and to a degree Japan. Plunging US and EU inflation expectations help to pull down long end yields as well.”
Key Quotes
“There has been an unmistakable regime shift in the Treasury yield curve that should lead to some good trading opportunities for tactical curve traders. In recent years the 2yr yield has anchored the Treasury curve with the curve pivoting steeper in sell-offs and flatter in rallies-all around a relatively static front end. Well today we can see that rate trends in both ends of the curve have diverged with 2yr yields trading near the highest levels since the spring of 2011 while 30yr yields trade near the lowest yields (excluding October's flash crash) since the beginning of the so-called taper tantrum in May 2013.”
“I don't think you need to be a rocket scientist to figure out what's going on: Fed expectations are driving front end rates higher while back-end yields are being driven by differentials and the outperformance in like maturities in Germany, the UK and to a degree Japan. Plunging US and EU inflation expectations help to pull down long end yields as well.”