Treasury yields blasted higher yesterday and the curve steepened as well. Let's investigate why.
US Treasury yields jumped significantly; the action was downright ugly for Treasury bulls. And yields continued their rise into the evening, albeit slightly.
US Treasury Yield Action October 3
Six Reasons Yields May Be Rising
- The economy is getting stronger. The ADP jobs report says the economy expanded by 230,000 jobs in September.
- Amazon (NASDAQ:AMZN) hiked its minimum wage. Some expect the Phillips Curve to kick in.
- Fed chairman Jerome Powell is yapping about how strong and sustainable the US economy is.
- Hedging costs in euro and yen are high and rising. That makes US Treasuries unattractive to foreign buyers who need to lock in gains in a currency other than dollars.
- Hedge funds are plowing into US Treasury shorts.
- Trump closed a trade deal with Canada and Mexico
1) Economy is Getting Stronger
ADP says US Payrolls Expanded by 230,000 Jobs in September.
2) Amazon
Amazon hiked its minimum wage. Some expect the Phillips Curve to kick in. The Phillips Curve theory is that there is a direct relationship between hiring and inflation.
The Phillips Curve is proven nonsense. A Fed study came to that conclusion, but it was obvious all along.
That does not matter one iota. What does matter is people believe in it. Janet Yellen was among the believers, despite the Fed study.
3) Jerome Powell Yapping yesterday
The New York Times reported yesterday Fed’s Powell Says Strong Economic Path ‘Not Too Good to Be True’.
The Wall Street Journal reported Fed Chair Powell Sees ‘Remarkably Positive Set of Economic Circumstances’
4) Hedging Costs
Bill Gross says hedging costs make US Treasuries unattractive for foreign buyers.
Zero Hedge has an interesting take and more charts in his post This Is Why Bonds Are Crashing, According To Bill Gross.
5) Hedge Funds Pile On US Treasury Shorts
Hedge funds are sort a record number of 10-year Treasury contracts. As long as shorts keep piling on, there is pressure on yields.
6) Trump closed a trade deal with Canada and Mexico
Part of the deal with Mexico involves an increase in Mexican wages that unions want. This is pretty feeble, as well as disputed, but some may believe it.
Assessing the Six Reasons
To assess the six reasons, we need to separate short-term factors from long-term factors.
Short-Term Reaction
To explain what took place yesterda, look at ADP, Jerome Powell, Amazon, and possibly Trump's trade deal, in that order. The latter is the weakest of any of the theories.
Alternatively, move Jerome Powell into the top spot, ahead of ADP.
Long Term Reaction
Bill Gross may indeed be onto something with his hedging theory.
And clearly, a build-up in treasury shorts does not help.
Expect a Huge Snap-Back
Without a doubt, there will be a huge snap-back huge at some point.
Record numbers of hedge funds all believing the same thing as the Fed is 100% guaranteed to be wrong in a major way.
The only question, as always, is timing.