US 10-year Treasuries hit the 3% mark, but now what? - Rabobank

Rabobank analysts are out with a note detailing why the US Treasury yield, which has been the subject of intense focus this week, may be getting propped up by knock-on structural factors rather than outright fear or market disarray.

Key quotes:

"After several years of serious flirtation, we finally saw the 10-year US Treasury yield go through 3.0% yesterday."

" Let’s not repeat that there are plenty of structural factors leaning on borrowing costs. Oil prices, which have seen a good recent correlation with higher bond yields, also dropped back quite sharply yesterday, -2.1% from intra-day peak to the close. Of course, oil is closely tied to political developments in Washington DC, where French President Macron is visiting US President Trump."

"Indeed, part of the oil sell-off, and hence briefness of the US 3% experience, was that Macron has proposed a new deal with Iran that would curb its nuclear program and ballistic missile development. Presumably this is instead of just withdrawing from the current “ridiculous, insane” deal cold, in Trump’s words. However, that optimism suggests Tehran is simply going to accept new terms offered to it - and there is no sign of that being the case. Let’s see what happens as we head towards 12 May."

"The same “next week is going to be interesting” timetable is also true for China, where yesterday the Politburo warned of something: that Q1 GDP was the highpoint for the year, and things are going to get far trickier ahead. Note that even as US yields flirt with 3%, China’s 10-year yield had fallen from 4.04% in late November to just 3.50% a few days ago. In fact, China is talking about the need for fiscal stimulus, which did see a brief spike in China’s 10-year yields back to 3.60%, but the trend remains down. Given the IMF says the fiscal deficit there is already 13% of GDP, that underlines the sensitivity around the country’s economic firewall of a huge trade surplus, without which things could get ugly fast."