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Our short-term view of US Treasuries has also played out. On September 4, we suggested that the yield on the 10-year instrument had overreacted to Hurricane Katrina, and that it would move away from the 4.0% area, to trade higher. Currently at 4.33%, this is exactly what has happened.
The technical picture still indicates a further rise in the yield, possibly to the 4.40-4.45% area. Readers will know of the technical significance we have placed on this area. Any break above it, would suggest that the yield can move higher still towards the 4.80-5.00% region. That said, it should act as good resistance in the short term, as the upcoming data too from the US is likely to be weak due to the economic effect of Hurricanes Katrina and Rita.
Yet, if we are to believe the Fed, which we do for the most part, the US economy will prove resilient, and will be boosted by the reconstruction effort. Furthermore, recent comments from Philadelphia Fed President Santomero give an indication of future central bank policy. He is stressing a need to remain committed to stable inflation, and is concerned that lower slack gives companies the potential to pass on or try to pass on increased costs in prices. Other hawkish comments from Fed members Yellen and Moskow on inflation also reveal how concerned the Fed is by oil-induced price pressures, while Mr Greenspan himself has expressed concern over the froth in the housing market. Against this backdrop, the Fed’s tightening cycle is still very much in place, and over the medium term, this should conspire to cause the 10-year yield to adjust to a somewhat higher level. Then again, as we mentioned last week, we do not think yields would stay that high for too long, given the ever increasing demand from pension funds for attractive levels of long-dated yield.
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