7th April - Can the US T Note go still higher?
10 April 2017
US TNote 7-10yr Total Return
Looking at the index over the
last twenty years it is
remarkable how well-defined
the bull channel has been.
Equally, it is clear that that
channel has broken down.
Note too, that the first
horizontal support has been
US Treasury 10 Yr T Note
monthly yield chart
This is not so clear.
The market has certainly
bounced off the same 1.4% yield
But the recent Prior High yield of
3% needs to be overcome the
bond bears would be convinced
that a yield bottom was truly in
place and they were in charge
As the reality dawned in November 2016 that Donald Trump would be the next US
President, markets began taking his campaign rhetoric seriously and what it would
mean for the US economy, assuming campaign sound bites became policy.
It didn’t take long before traders drew the conclusion that Trump’s plans to spend
heavily on infrastructure renewal, increase defence spending and cut tax would
pump up the US economy while at the same time threatening to drive up inflation.
The impact on markets was clear:
US and global stocks rallied
US Notes sold off
And although the rally in equity markets lasted throughout the first quarter of this
year, the sell-off in T Notes bottomed in mid December 2016, leaving that market in a
clearly defined trading range. But in recent weeks T Notes have begun testing the
top of the range, while the rally in equities seems to have stalled. Why?
The answer is that Trump’s first attempt to get a key piece of policy passed through
Congress and into law failed. The inability to repeal and replace “Obama care” left
traders wondering if that might prove to be the fate of much of Trump’s other policy
If that was to be the outcome, then the economy would probably plod along at its
current moderate pace and inflation would remain relatively benign, meaning a
That assessment didn’t last long. The Trump Presidency remains very much in the early
days, and it is far too soon to judge how successful he will be. In fact, White House aides
have been in talks with Congressional leaders only this week in an attempt to revive
Trump’s healthcare plans.
So is the T Note about to beak out of the trading range to the upside?
We don’t think so.
T Notes have held in as well as they have because of the degree of uncertainty about
Trump’s ability to progress his policy agenda, especially when he spent much of his first
few weeks in office pre-occupied with the media and so called fake-news.
But because he is a businessman turned politician he is learning that politics is done
differently to business and recently he is beginning to sound more like the US President
than a property mogul.
Our view is Trump will push through his agenda. His plans for infrastructure spending on
roads, bridges, tunnels schools and hospitals could be in the region of US$1.Tn. Given
his intention to bring jobs back to the US, nearly all of that money will be spent in the US
and US Companies will be big beneficiaries which must be stock market bullish.
Since that spending will be financed through higher borrowing, the Fed will soon have to
shift up a few policy gears and become more hawkish as inflation rears its head and that
will be T Note bearish.
Once traders draw that conclusion, which we judge they soon will, the Trump trade will be
back on and T Notes and Bonds generally will be making new lows in price terms and
higher highs in yield terms.