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Rates Spark: And We're Off, Or Should Be


  • If you think last Friday's US payrolls report was a one-off, think again. Another increase in excess of 1 million is coming for April.
  • The only mystery is why US market rates have not risen by more. We think they will. The 5-year is now cheap to the curve, finally.
  • As the 5-year continues to cheapen, market rates will rise in tandem. Next, the 10-year to touch 2%?

By Padhraic Garvey, CFA, Benjamin Schroeder, Senior Rates Strategist and Antoine Bouvet, Senior Rates Strategist

(Source: Shutterstock)

Does a 1.7% US Treasury yield look right after Friday's payrolls report?

Our chief international economist James Knightley expects more than a million jobs to be added in the next report, and it goes on. This is a boom period for the US economy.

Granted, it is all about emerging from a hole of Covid-19-induced despair, but it will still manifest a near-10% expansion of nominal GDP in the space of just one year. And that is an actual expansion; none of that annualized malarky.

We chose the nominal measure of expansion purposely, as it includes inflation. So, too, do market rates.

In that respect, we can and should compare a 10% nominal GDP expansion with the 1.7% yield on the 10-yr US Treasury and conclude that the latter looks quite low. It is, in fact, quite remarkable how market rates have managed to remain relatively subdued. Yes, the 10-yr rate is up from a low of 50 basis points, but the absolute level is not that remarkable (apart from being very low versus nominal GDP expansion).

5-yr has cheapened on the curve, but rates are a long way from "normalised"

The structure of the curve has become more bearish, signaling further rises in rates

A notable occurrence in the wake of Friday's payrolls report is the 5-yr area finally traded absolutely cheap to the curve. It had been cheapening for a number of months but was only getting less rich. At the close on Friday, it was finally trading cheap to the curve. This is important, as a cheap 5-yr and/or a cheapening in the 5-yr typically correlates with a move higher in market rates. The 5-yr has considerable room to cheapen some more, which suggests

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