Monday, May 7, 2012

Olson Global : Global Worries Could Send 10-Year Treasury Yields To New Lows

Interesting to note in the following report is the reference to  the highest oil inventories in 21 years. Most familiar with this blog will recall the stories about global shortages of oil. Clearly not true. Aivars Lode

A weaker-than-expected 2.2% rise in Q1 GDP, a disappointingly dismal
monthly jobs report and a likely political shift away from austerity
measures in Europe sent German 10-year bunds to a record low yield of
1.58% last week. In concert with German yields, yields on U.S.
treasury 10-year note (TNX) fell to a closing level of 1.88%. While
Friday’s close was still above its record low of 1.696% set last
September, they appear poised to set new record lows in the weeks just

While a shift away from austerity in Europe hints of a move toward
massive fiscal stimulus and the possibility of a rise in inflation
rates, the more immediate threat of a default on sovereign debt in
Spain or Greece is troublesome in the near-term for stability of
European banks.

Adding to the likelihood of a move toward lower 10-year note yields
was a sharp drop in crude oil prices on Friday. An unexpected 2.84
million gain in crude oil inventories pushed the overall U.S.
stockpile to 375.9 million barrels, a 21-year high.

Although monthly technical oscillators remain in an extreme condition
on U.S. 10-year Treasury notes (TNX), a push down toward key “channel
bottom” support (in terms of yield) that now sits at the 1.40% level
is clearly possible.

Currently, U.S. 10-year notes remain above German bunds as well as
Japanese JGBs, which are currently offering yields below the 1% level
making U.S. bonds relatively attractive. Nevertheless, the Treasury
department is scheduled to sell $24 billion fresh 10-year treasury
notes on Wednesday, which could temporarily depress bond prices and
lift yields a bit in front of the auction. It will be the auction
results and the digestion of those notes that could trigger a renewed
move toward lower yields.

By Jim Donnelly, Olson Global Markets

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