The move higher in US Treasury yields continued last night with a further bias towards a steepening curve with the 2s10s year spread out at 62bps from the tight levels of early January, of around 50bps. One of the reasons given for this is the massive US borrowing schedule in the first quarter of 2018. The US Treasury is to borrow around $441bn versus the $282bn they borrowed in the last quarter of 2017. However, this huge Q1 refinancing should leave the Treasury with an end-March cash position of $210bn, leading to a meagre $176bn in borrowing during the March/June quarter, and a cash balance of $360bn by the end of June. Therefore, it is understandable that in the short-term yields have moved higher to try and clear the supply. If the consensus outlook for the US economy was for a slowdown in activity, this supply would be swallowed up by investors but at the moment the consensus is looking the other way; with the majority of investors worried about the impact of the tax cuts and a pick-up in inflation.
We continue to look for a slowdown later in the year and a flatter, lower level in longer-dated yields helped on their way by the two or three further rate hikes, which we expect this year as the near term inflation pick-up falters and as a combination of the rate hikes and the Fed continuing to shrink their balance sheet reduces the underlying support to economic activity.
If we look back to the growth in the 1980’s the expansion lasted 92 months with average GDP of 4.3%, in the 1990’s a 120 month expansion, GDP averaged 3.6%, in early 2000 a 73 month expansion in GDP averaged 2.7%, while the current expansion of 104 months GDP has averaged just 1.8%. The declining growth rate in the US economy has been matched by declining inflationary pressures and lower interest rates and with the US demographic outlook and the continuing innovation affecting the future plausible expansion period. This move higher in US Treasury yields helped by the supply situation could emerge as a very big buying opportunity.
So this afternoon we had January’s all important Non-Farm Payrolls data which came in at +200k a little stronger than consensus but with the addition of a further revision to December of +12k. The unemployment rate was stable at 4.1% and average hourly earnings were up 0.3% MoM; which is quite high on the YoY comparison at 2.9%. Broadly, a stronger report overall but not too much higher, the inflation indicators are a negative as expected by us over the coming few reports. US Treasuries continue to struggle with the supply situation with yields higher, at the time of writing, by 2-3bp across the curve.