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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

level twice.

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

relaxed Fed.

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.


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