Trading Post

Last updated: April 16, 2014 1:36 pm

Bond market indicates deflationary fears

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Benchmark yields are not playing to forecasts of rising rates

US 10-year bond yields this week fell within a few basis points of five-month lows.

The move has made some traders nervous, their anxiety a function of a market wrongfooted.

A survey of 66 Wall Street economists by Bloomberg shows an average forecast for 10-year Treasury yields of 2.98 in the second quarter of this year. By the fourth quarter, yields are expected to be 3.35 per cent.

Three-month Eurodollar interest rate futures are displaying record net bearish positioning by speculators – short 1.2 million contracts – indicating increasing expectations that borrowing costs will rise, probably by the middle of 2015.

These views seem compatible with recent US data that provide evidence the economy is improving after its weather-related slowdown at the start of the year.

And yet by mid-session on Wednesday, benchmark yields were 2.65 per cent.

Haven flows in the light of the equity market’s recent “momentum” shellacking and Ukraine tensions are explanations that will be considered more benign, because both may prove relatively fleeting.

More worrying for equity-focused bulls is that the bond market senses a deflationary environment is approaching.

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