US Treasury Bond Market: Week of March 25, 2019

This blog on interest rates will be published every Sunday night.

What is it intended to do? I began giving daily updates to traders at Wall Street firms in the 1980s.  Later, I wrote market updates to US government agencies such as Ginnie Mae and the Federal Housing Finance Agency regarding critical market issues that affected them or those whom they regulated.

It will tell you how and why interest rates moved the previous week, and what to look for in the coming week that may have an impact on rates.

Who is it written for?  It is written for anyone that would benefit- professionally or financially, from a description of the movement of interest rates over time, and, an ability to describe the reasons for those movements to superiors and clients.  It is also written for traders and investors who want clear descriptions from a market professional about the important themes driving rates in the future.

Structure: I strongly believe that understanding rate movements is often a study of the history of how we got to where we are.  Once a month I will review rate history going back to some important event and give you a context in which to understand how we got there and there to where we are now.  Some may not think this relevant, but if you see with your own eyes the effect of, for example, deflation fears on rates, you will know what is possible the next time it becomes a market theme.

Chart 1: Major Movement and Levels of the UST 10-year Note from the July 2016 High

UST 10-year 1.37 to 3.23

  • The all-time low yield on the UST 10-year was 1.37% in July of 2016.  The last Sunday of the month I will sue to explore history: At that time, I will explain the events that got us to 1.37%.
  • After the Trump election, the market remembered that he had promised large tax cuts.  Since expenditures were not going to be cut as well, the US deficit would have to increase.  It is estimated $1 Trillion in additional securities needed to be issued.  More bonds, higher rates needed to sell them, period.
  • Rates rose from 1.76% to 2.62% as the greater expected supply due to the tax cut caused rates to rise.  That’s why we study history; that’s what threatened deficits can do.
  • Then, when it looked like Trump couldn’t get the tax deal done in late 2017, rates fell from 2.63% to 2.01% (follow on Chart 1) on the likelihood there would be $1 Trillion less to sell.
  •  Uh-oh, suddenly it was announced that the 2017 tax cut was getting done, and rates rose to 3.23% (note the “double bottom” on the RHS of Chart 1), the 3.23% high (rate).

Why Have Rates Fallen Since December?  Fear that the US economy is slowing.

  • Economic data from China and especially Europe has begun to slow.
  • This recovery is, by historical standards, very old.  The record longest expansion (a period without a recession) is 120 months (June 1991-June 2001).  This recovery started in June 2009.  The data go all the way back to the 1800s.  At some point, there is going to be a recession.
  • There is not enough space to discuss all the recent US economic data, but the broadest measure of economic strength- Gross National Product, is definitely slowing.

Chart 2: US GDP by Quarter

  • US GDP appears to be slowing.  Many estimates of Q1 2019 GDP are under 2%.
  • Some believe 2018 GDP was jacked by the 2017 tax cuts.  But, the stimulative impact of that tax bill falls in 2019-20.US GDP by Quarter
  • The Fed, which has been raising rates from 0.125% in December 2015 to 2.3875% today, may have helped bring about the slowing of the economy they have sought.  If the economy is slowing on its own, there is no reason for the Fed to continue to raise rates.  The markets guessed in December that the Fed was done raising rates, and rates on UST securities have fallen since then.

Last Week’s Movement of the UST 10-year Note

The UST 10-year, along with the federal funds rate, are the two most interest rates in the US and arguably the world.  Many world securities- emerging market, mortgage, and corporate securities trade at an interest rate spread to the US 10-year.  So, let’s start there.

We will constantly be talking about “levels”.  Levels are a place where the market tends to stop.  In technical analysis, there are points are called “support and resistance”.  We will use these terms interchangeably with one exception; levels are places where the market tends to stay for sometimes weeks, sometimes months.


Chart 3: Movement of the UST 10-year Note Last Week

From here it gets a bit more technical.  Stay with me week-to-week and in a few weeks, you will understand this well.  Securities like the German Bund, and events like US Treasury auctions (or refunding’s; selling debt to finance the deficit) you will learn to watch as you learn their impact on US rates.

UST10year_Week of Mar 25 2019

Source: CNBC

The UST market advanced last week as rates continue to fall.  The critical level is 2.34%.

2.34% is the gateway to 2%.  It is going to be difficult to crack without more of the fuel that has been driving rates lower since 3.23%- economic data leading markets to anticipate a slowing of the US economy.

  • On Wednesday UST 10s 102-06+ (2.375%%), off the 101-24 (2.425%) close Tuesday.  2.375% is a minor level, and it is banging on that now.   If you follow us, you know that the big one to break is 2.34%
  • We bounced off of 2.35% Wednesday morning, part of an attack on 2.34% that will eventually succeed.
  • That’s because the markets driving narrative is mutating, intensifying.
  • Back in Q4 2018, the market just wanted the Fed to stop tightening into what appeared to be a weakening economy.  The market just wanted a “pause”.
  •  Now, the market has gone Full-Monty: It now wants pre-emptive rate reductions to prevent deflation.  That implies a series of rate cuts.
  • Though US data in no way leads one to believe that a recession is near, the market knows it’s about time.  The party has lasted close to the 120-month record and may exceed it, but the real challenge is if it can be extended and how bad it will be if they cannot.
  • We backed off 2.35% and by Friday closed at 2.40%.  But expect further attacks on 2.34%

The Yield Curve

As for the curve, the increase of the 2/5 spread from -8 to -5 bps, and the steepening of 2/10 from 14 to 17.5 bps implies the markets see the greater nearness of a rate cut.  If the Feds going to ease soon, this must steepen (the spread between UST 2-year and UST 10 -year will widen out past 20, not flatten.

The Bund

The 10-year German Bund has now gone negative.  Euro markets got another further delay in tightening from Draghi last week.

Important Data Next Week (Week of April 1)

Remember, we are looking for weaker data that will push us through 2.34%.  It is important that this happens next week, as in the following week the US Treasury will sell over $70B of 3-year, 10-year, and 30-year securities in the April mini refunding.

The three most important economic indicators determining rates are Gross National Product (GDP), The Consumer Price Index (CPI), and Payrolls/Unemployment Rate.  In terms of determining what the Fed will do, these are the “Big Three”.  Though other data matters as well- particularly if it is significantly weaker or stronger than forecast, those three will matter most.  Particular attention should be paid at the day and time those data are released.

US payroll growth (Non-Farm Payrolls) is the number of jobs the economy creates each month.  It has averaged greater than 200k per month over the last year- very strong growth.   Any slowdown under 100k-130k will be considered signs of a weakening US economy, and rates would fall.

The key next week will be getting any of the data below to come in weaker than expected, especially if it is significantly weaker, indicating a deceleration of the economy and confirmation of the market narrative that the US economy will slow.  That is what has caused rates to fall the past three months (3.23% to 2.40% last Friday).

Next Week’s Important Economic Releases

April 1 Week Calendar


Levels to Watch

UST 10-years need to take 2.34%.  When they do not, we must not break 2.44% support.

If we break 2.34% this week, then expect 2.28%, then 2.17%.


Please feel free to comment (this is written for you) so I can make this blog better.  See you next Sunday!

Bio of the author:IMG_0133

John Jackson is the author of this blog.  John started trading bonds in 1979 for GE Credit Corp and has worked at a number of Wall Street firms as an US Treasury arbitrage trader.  His specialty is yield curve arbitrage and his long experience with the Fed has made him an insightful analyst of their thinking.

Jackson is a graduate of Yale University with a degree in economics, and, the Columbia University Graduate School of Business Administration, with an MBA in Finance and Money and Financial Markets.

John is the senior trader for a mortgage company in Virginia.