Strategic Briefing | 12.27.13 | Rising US Interest Rates

Treasury 10-Year Yield Rises to 3% on Fed Policy, Recovery Signs
Bloomberg | Dec 27
“The pace of the U.S. economic recovery means there’s room for the 10-year yield to rise further, perhaps towards 3.25 percent in 2014,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “I don’t think it will go much higher from there. We expect the Fed to keep official interest rates low for another 18 to 24 months.”

US Treasury yields top 3% after Fed taper
Financial Times | Dec 27
But the recent rise in yields has come when economic data, particularly for housing, has been solid, seen as validating the decison of the Fed to taper QE.
“At this point it seems clear that the fear of higher interest rates hurting housing is overblown,” said Ajay Rajadhyaksha, co-head of FICC research at Barclays.
Also, in contrast with September, 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 per cent at that date, well shy of its 1.50 per cent peak seen as recently in September when the market believed that a taper would be followed by a rapid pace of monetary policy being tightened.
“It’s difficult to make a case that 10-year yields will rise from here unless the market accelerates the tightening cycle,” said Mr Rajadhyaksha.

10-Year Treasury Yield Touches 3%
The Wall Street Journal | Dec 26
“The bond market will be fine if the rise in yields is orderly and slowly rising, with limited inflation,” said Kevin Giddis, head of fixed income at Raymond James in Memphis, Tenn. “The problems begin when you combine velocity and a spike in consumer prices.”

Treasury 10-Year Note Yields Reach Highest Level Since September
Bloomberg | Dec 26
“The economy is gaining strength; rates will go higher,” said David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors. “We are in holiday mode right now, so markets are extremely thin.”

10-year Treasury hits key 3% level
USA Today | Dec 26
“If long-term interest rates rise too rapidly, we could see stronger headwinds develop in housing, autos and business spending, (which) could temper our optimistic economic outlook,” says Anderson. “Gradual rate increases that are matched by stronger sales, and improved investment opportunities are not as concerning as interest rates that are on the rise because the Fed is no longer a major buyer in the U.S. Treasury market.”

U.S. 10-year yield edges up near 3 pct on light trade
Reuters | Dec 26
If the 10-year Treasury yield, a benchmark for mortgage rates and investment returns, were to rise much above 3 percent, it might be a negative for stocks and other risky assets. A further rise in bond yields would push up long-term borrowing costs, taking steam out of the economic recovery — similar to what happened this past summer, analysts said.
“Other markets will take notice if we establish a foothold above 3 percent,” said Rob Zukowski, senior technical analyst at 4Cast Ltd in New York.

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