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What Do the July Fed Statement and Intermarket Relationships Say About Interest Rates?

Yahoo! Finance
The Exchange

By John Kosar, CMT

The blue line in the middle panel of the chart below plots the daily spread between prices of the US T-Bond and the Euro Bund since 2009.

This green ellipse in the lower panel shows that the T-Bond is starting to rebound from quarterly oversold extremes versus the Euro Bund (red line, lower panel), while the green vertical highlights between all 3 panels show that previous instances of this have coincided with what have been the most important bottoms in the price of the T-Bond (black bars, upper panel) in recent history.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.

From the July 30th-31st FOMC Statement

Most investors seem convinced that long term US interest rates have bottomed and are now in the early stages of a major move higher, and for good reason. The yield of the bellwether US 10-Year Treasury Note has already spiked higher by more than 100 basis points since May, climbing as high as 2.74% on Thursday of last week.

However, our chart above, plus other key market factors that we track, are now suggesting otherwise — at least over the near term. Moreover, we could be seeing the beginning of this right now, as long dated Treasury prices spiked higher on Friday in the wake of disappointing July jobs data, as the bond market quickly priced in the potential for continued/additional aggressive accommodation by the Fed.

John Kosar, CMT, has 30 years of experience and insight in covering the global financial markets. John spent the first half of his career on the trading floor of the Chicago futures exchanges, where he had the opportunity to learn how the US financial markets work from the inside out. This experience, early in his career, became the foundation for the unique analysis, insight and perspective that defines Asbury Research. John is frequently quoted in the financial press both in the US and abroad, and can be seen regularly on U.S. financial television.