|Treasury yields rose sharply last week, with intermediate and long date bonds registering the sharpest price declines, as US equities again reached new highs. Friday’s eagerly anticipated May employment report came in line with market expectations, continuing to signal gradual improvement in the labor market. With +217,000 jobs created last month, May marked the first 4-month string of payroll reports over +200,000 since 1999. With a yield of 2.62%, the 10 year Treasury note has now risen over twenty basis points since reaching a yearly low last month. With global growth and inflation remaining low, we are of the opinion that the recent reversal in interest rates is simply a corrective move within a well-defined yield range: 2.40%-2.80%.
Equally important last week, the European Central Bank (ECB) announced further aggressive and unprecedented steps in their multiyear campaign to promote growth and ward off potential deflation. The ECB lowered rates on three key short term rates that they control, including setting the rate for assets that banks have on deposit with the central bank to a negative number (-0.10%). Simply put, the ECB will now be pumping a large amount of liquidity into the European system. With the Federal Reserve exiting their unprecedented monetary policy, and while the ECB embarks on theirs, sovereign yields are marking recent extremes. Unthinkable just a few years ago, interest rates on Italian and Spanish five year bonds are now lower than US Treasury five year notes. Further out the curve, US 10y yields are now at their widest level to German 10y yields in 9 years.
Attention this week will be on the retail sales number on Thursday and the Producer Price Index release on Friday. Additionally, the Treasury will be auctioning off $62 billion of new supply this week (3y, 10, 30y).