U.S. Treasurys: Testing The Upper Limit?
10:01:00, May 26, 2008
Last week's selloff in Treasurys is likely to be short-lived, due to still weak domestic economic conditions and house price deflation.
Rising oil prices are stoking already excited inflation fears, which has backlashed into the Treasury market. However, the epicentre of U.S. economic weakness, the housing market, is not yet able to support higher bond yields. The mortgage refinancing index turned south as soon as yields started to climb.
Thus, there is a cap on how high yields can rise until AFTER the economy stabilizes, and we expect that Treasurys will trade in a range at or below current levels in the coming months. To this end, the equity market is starting to signal that yields are hitting the upper limit, and stocks will remain at risk until (oil-induced) inflation fears calm. Stay tuned.
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