The bigger picture for markets, however, continues to be dominated by U.S. yields and the Fed policy outlook.
Wall Street slumped on Thursday after the 30-year Treasury bond sale. The high yield investors demanded was around 4 basis points higher than the prevailing market rate at the time, the biggest ‘tail’ in nearly two years.
The ebb and flow of investor sentiment this week, centered around moves in Treasury yields and the U.S. yield curve, is instructive.
Essentially, it hasn’t really mattered if the curve has steepened or flattened – what has mattered is whether the moves have been led by bond buying or bond selling, either at the short or long end.
On Thursday the yield curve flattened the most in a single day since March, a ‘bull’ flattening led by heavy buying of long-dated bonds. Stocks rose. On Friday the curve ‘bear steepened,’ led by heavy selling at the long end. Stocks fell.
So markets end the week at the mercy of this push and pull over the U.S. rate outlook: strong signals from Fed officials and Fed minutes that rate hikes are probably over, against economic data that is still refusing to play ball.
One clear winner, though, is the dollar. It jumped 0.7% on Thursday – its best day since July – pushing the yen back down toward the key 150.00 per dollar area. Japanese intervention speculation is bound to swirl on Friday if that level breaks.
