Several weeks ago I took up the subject of interest rates and their prospects moving forward. There has been a lot of back and forth over the subject of the Fed “tapering” off purchases of Treasury (and other) securities as it sees economic conditions improve. Predictably, the markets have been waved back and forth by the interpretations of comments by Bernanke and anyone else of note who talks about monetary policy. At this point, things seem to have stabilized a bit. This Zero Hedge post indicates that most Wall Street shops think September will be when the Fed starts to back off its monthly purchases.
One of the reasons that has come up lately is the prospect of reduced Treasury issuance. As this Business Insider article points out, smaller US federal deficits are expected to see a steady decline in how much paper the government will be selling each year. If the Fed were to keep buying it would really hamper Treasury market liquidity (which it has already impacted by sucking up so much of the supply). If the Fed lowers purchases by the same amount as the Treasury reduces supply then there will be no net impact on supply/demand.
Of course it’s the prospect of the Fed tapering purchases off even faster than the Treasury cuts back on selling which has participants worried about the prospects for interest rates. That was the focus of my prior piece and is primarily going to be a function of the economy and the Fed’s expectations for it moving forward.
Back at the start of June when my previous article was posted I indicated that 2.40% on the US 10yr Note yield was going to be important (resistance in the form of a pair of prior peaks in 2011 and 2012). The fact that the market blew right through there tells us a lot about its strength (or weakness in price terms).
I do think the market is due for a bit of a breather, though. Notice in the weekly chart below how wide the Bollinger Bands have gotten of late (bottom plot being the Band Width indication).
With the Bands wider than they were in 2012 and not far off the 2011 peak, this is a good time to look for a least a little bit of a break. Given the way markets often go into snooze mode during the August dog days, and the expectation that September will bring interesting developments, this is as good a time as any for rates to settle into a range and consolidate ahead of the next move. The 2.40% level now is nearby support, with the 2.10% breakout point from earlier in the year a key level below there.