Thursday, June 7, 2007

Yields Move Over 5%

From Bloomberg:

U.S. Treasuries fell, pushing the 10- year yield above 5 percent for the first time since August, as traders added to bets interest rates will rise around the world.

Two-year yields also gained after New Zealand policy makers unexpectedly raised rates today and the European Central Bank lifted its benchmark to a six-year high yesterday. Futures traders added to wagers today on further increases by the ECB and the Bank of England, and reduced bets the Federal Reserve will need to lower borrowing this year to fuel economic growth.

``Investors took fright at the New Zealand move,'' said Stuart Thomson, a bond fund manager at Resolution Investment Management Ltd. in Glasgow, Scotland. ``Global growth is too strong, yields have to rise. The trend is bearish.''

The yield on the benchmark 10-year note rose 4 basis points to 5.01 percent as of 11:42 a.m. in London, according to bond broker Cantor Fitzgerald LP. The yield is the highest since August 15. The price of the 4 1/2 percent bond due May 2017 fell 10/32, or $3.13 per $1,000 face amount, to 96 1/16. Bond yields move inversely to prices.

Traders like round numbers, and 5% most certainly qualifies. There have been several articles over the last few days citing traders statement that 5% was an important level for Treasuries. If the 10-year crossed this level, the next stop was 5.25%.

Notice how quickly sentiment has changed:

Traders see an 18 percent chance the Fed will lower its benchmark rate to 5 percent by year-end, compared with odds of 40 percent last week and 98 percent a month ago, according to Fed funds futures. The decline followed reports showing the services sector and employment grew at a faster-than-expected pace in May.

In one week, sentiment has really shifted away from the Fed cutting rates. Despite the Federal Reserve continuously stating for the past few months that inflation was their main concern, traders simply didn't listen until recently.

Frankly, I still don't see what the big fuss is about. 5.25% isn't a high interest rates. Actually 5.75% isn't that high, either. The 10-year was trading at higher levels during the 1990s and the economy did just fine. I think adding to the problem is equity traders are looking for a reason to take profits and yields are as good a reason as any.