Just like the equity markets, US Treasury (NYSEARCA:TLT) rates have been boring to watch as well. Of course, that doesn't mean nothing is happening. It just isn't apparent from the surface. One would need to dig to find the little clues, and that is what we do best at Reading The Markets. We go through this exercise to find the opportunity before others.
First, let's see what the direction of the yield curve has been over the past six months. The beautiful thing about these charts is that we can see the movement over periods of time. It is amazing to see.
Amazing to see this way? Two things strike me immediately. First is the distance the long-end of the Japanese yield has traveled since the end of July, while the short-end of the curve has remained relatively the same. The steepening curve began to change when the BOJ pegged the 10-year JGB to zero back in September. Did it accomplish its mission? I'd say so. It wanted a steeper yield, and that is what it has gotten. More on this later.
The second thing is the US yield curve. It may not be so apparent at first, but I notice it very quickly. If you look at the curve at the five-year mark, the trend of the curve almost gets a convex shape to it. The shifting curve is fascinating to me for two reasons. The first being that this appears to be a change from the summer. Second, because to me, it likely means the market is expecting rates to rise faster in the short term, and a slow pace in the longer term. That would imply that inflation picture is likely to be the same.
Here, you can see on the 10-2s exactly what we described in the first part. The yield curve of Japan steepening. While the US yield curve has been narrowing. Additionally, the spread between the US and German, and US and Japanese bond yield has once again started to widen as well while you can see Japan and German have remained pretty flat.
If the spreads start to widen on the 10-10s chart, it should also imply that the weakness we have seen in the US Dollar (NYSEARCA:UUP) over the past few weeks is likely to start reversing as well.
Below is a video to complement this article. In it, Jane King of Lilamax Media and I talk about a strong Dollar and its potential impact on the market. It is shot live at the Nasdaq MarketSite.
Also, the Financials (NYSEARCA:XLF) has seen recent price action, which has been sideways; a coincidence with the narrowing US 10-2s spread.
Should the spread continue to contract, it is likely to impact the bank's net interest margins, which would, of course, impact bank's earning power.
Additionally, a stronger Dollar is likely to hurt commodities such as Gold (NYSEARCA:GLD) once again.
The market is always sending signals, and there seems to be a slight change over the last couple of weeks in the spreads and direction of the global yield curves. A shifting yield curve and contracting or widening spreads will have a direct impact on the Dollar and Financials. It will also have a direct bearing on commodities such as Gold.
In the totally redesigned and repriced Reading The Markets members section, we look for significant trends like the one we wrote about today. However, in the member area, we take it a step further now and provide members with spreadsheets to help them find the stocks directly being impacted by these trends, so they can better capitalize on the shifting markets.
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