Has Gov’t Shutdown Affected the Bond Market? And More From Liberty SBF – 10/3/2013

How has the government shutdown affected the bond market?

Fives and 10s haven’t moved. Appears that only economic data, Treasury auctions, and the Fed are influencing rates though barely. If we still see an impasse next week with no compromise reached in Congress investors could tense. But 10s are trading tight between 2.58 -2.68% since last Monday, and not just waiting for the next D.C. deadline.

Jim Vogel, my favorite economist who works at FTN explores four distinct moves since May:

“A chart review for 10-year UST since May shows four distinct moves. From 2.0 to 2.4% made fundamental sense in light of the signals the Fed sent about its economic outlook and an end to QE. Next, 2.4 to 2.6% represented a global portfolio rebalancing that was necessary in case the Fed moved faster than expected. In July, 2.6 to 2.75% came on data that temporarily suggested the Fed’s economic instincts were correct and the tide was about to start rising quickly. The last upward move to 3.0% was on premature curve flattening trades and the overreaction to the pending Summers appointment.

Walking those moves backward, fundamentals indicate confusion about the ability of the economy to quickly overcome tighter financial conditions. Boom, 10-year yields are back at 2.75% after Summers’s withdrawal took rates down 10bp. Then, dovish Fed voices are finally heard on the possibility the Fed will move as the FOMC has indicated, rather than faster (Dudley’s comments on Sept 23). That’s the last 15bp of the move in the second half of September.”

What changes interest rates? If economic data underperforms, 2.4% could be a new floor. 2.65% and 2.75% represent middle ground until we hear from the Fed again in October. A sell-off to 2.88% would require a lot of good data.

– Alex Cohen, CEO, Liberty SBF

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