Sitting On Big Levels For Interest Rate Markets

By Bryan Rich

February 8, 5:00 pm EST

Let’s take a look at some key charts as we end the week.

As we discussed yesterday, we had growth downgrades from Europe this week, and it was driven by the worst case scenarios of a no-deal on Brexit, and/or a continued stalemate/no deal on U.S. China trade.

Let’s see how that’s being interpreted in the key global interest rate markets.

First, we should acknowledge that the big swing in global economic sentiment was driven by the optimism surrounding the 2016 elections (i.e. a pro-growth U.S. President).

That gave us a sharp rise in global interest rates, and a sharp rise in global stock markets.  But now some of the air has been taken out of the optimism-balloon, and some big levels are being tested.

First, here’s a look at the U.S. 10-year yield.  On election night the 10-year was trading around 1.75%.  It has traded as high as 3.25% since.  But now we have this big line representing the rise from election night …

 

 

The 2.55% area is a big area for U.S. rates.

And in Germany, the German 10-year yield has returned to pre-Trump levels this week. 

After a decade of global QE, loads of global fiscal stimulus and countless backstops/intervention, lending your money to the German government for 10 years (the strongest economy in the euro zone) will pay you 9 basis points a year.
So, the interest rate market sits on critical levels heading into next week.
While a lot of attention by global politicians has been given to U.S. policy, this should be a clear signal to eurozone politicians to stop relying on the ECB, and to take some aggressive action to stimulate the economy (i.e. fiscal stimulus and structural reform).
Still, the move in rates looks well overdone.  Probably a good time to sell bonds – looking for rates to move higher from here.
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