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U.S. Treasury Yields Could Be About To Break Out

Washington

The brawny greenback has been halted in its tracks and Treasury yields edged lower after president Trump criticized the Fed over its hawkish policy and, surprisingly, objected to a strong dollar.

The Dollar Index had hit a one-year high of 95.65 in Thursday’s intraday session after Trump told CNBC's Joe Kernen in a Thursday interview that he thought Fed chair Jerome Powell is a “very good man” but did not like his policy of hiking interest rates. Now the dollar index has slipped 1.5 percent to 94.34.

The two-year Treasury dipped to 2.58 percent shortly after Trump made his comments, while the 10-year dropped to 2.86 percent.

Unexpected Comments

The president’s comments were quite unexpected considering that he had expressed his desire for a stronger buck as recently as January, saying: "The dollar is going to get stronger and stronger and ultimately I want to see a strong dollar,"

Maybe he just didn’t expect it to take the form of the central bank repeatedly tamping down the economy in a bid to keep it from overheating. But in the same vein, Trump added that he’s not going to control the Fed’s actions:

“I’m not thrilled,” Trump told Kernen. Because we go up and every time you go up they want to raise rates again. I don’t really — I am not happy about it. But at the same time I’m letting them do what they feel is best.” He added, “I don’t like all of this work that we’re putting into this economy and then I see rates going up.” Related: Gold Investors In A Frenzy Over Sunken Russian Warship

Neither the president nor Congress has day-to-day authority over the Fed, though of course they have absolute control and oversight in the long-run including the power to fire and appoint new members. In January, the president failed to reappoint Janet Yellen, the person who presided over major improvements in the economy including one of the biggest drops in unemployment in modern history and strong financial markets, and instead replaced her with Jerome Powell, a man who is seen as being qualified for the job but not of the same credentials as his predecessor.

Treasury Rates Ready for Break-Out

Trump’s latest comments about bond rates show eerie timing—because they have come amid the appearance of a highly unusual sign in the bond market. The 10-year Treasury had been trading in a tight range for 14 consecutive sessions, usually a precursor for a major breakout in one direction or other.

In the five prior periods where yields have traded on such a narrow range (less than 12.6 basis points), the 10-year yield ended breaking higher in four out of five instances. The 10-year yield has been moving within a range of 2.802 percent and 2.882 percent for 14 days prior to Trump’s latest tirade. It’s very rare for the 10-year to trade in such a narrow band for 14 consecutive sessions.

Recession This Summer?

Given that historical context and Powell’s recent hawkish comments, then it’s probably safe to conclude that rates are likely to continue going higher, rather than reversing course.

But that was only true before Trump spoke.

It would probably not be 100 percent fair to term Trump’s commentary as a veiled threat to the Fed, but that was the intended effect anyway. It’s a big deal because the president actually broke precedent under which presidents desist from making comments about the Fed so as to safeguard its independence.

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Then again, the Fed has to be careful with the aggressiveness of the hikes because of a flattening yield curve. The difference between the 10-year Treasury yield and the 2-year note fell to 24 basis points on Tuesday, an 11-year low.

(Click to enlarge)

Source: Federal Reserve Bank of St. Louis

Natixis economist Joseph LaVorgna believes the yield curve could flip—with shorter-term rates rising above longer-term rates—after the Fed meets in September, which would signal a recession beginning next summer.

By Alex Kimani for Safehaven.com

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