US yields drop back sharply

Due to lower real yields and lower inflation expectations

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The US 10-year yield dropped by 11 bp to 1.53% yesterday, with that move split roughly 50/50 between lower real TIPS yields and a lower breakeven inflation rate. That was pretty unusual given the string of strong US data out. Some suggested this was because the strong data made traders think the Fed would tighten policy sooner, which would have the effect of reducing the likelihood of higher inflation further out. Some others said the move simply reflects a shift in positioning as traders close their recent shorts, though that does beg the question of why traders would want to do that given the data. Either way, this could be a sign that yields have topped, at least for now.

Macro

The first piece of good news was that US initial jobless claims fell below 600k last week.

US retail sales rose sharply by 9.8% MoM in March, while control group retail sales - which feed into the GDP data for consumption - rose by 6.9%. On a YoY basis, retail sales were up by 27.7% compared to the start of the lockdown last year. The strong gain was due to the stimulus checks and the re-opening.

Meanwhile, US industrial production rose to 1.0% YoY in March, though that is still over 3% below the level before the lockdowns. The ISM manufacturing index suggests growth should continue to rebound.

China reported that GDP growth rose to 18.3% YoY in Q4, with powerful base effects at work from the big drop in GDP last year.

Retail sales growth rose to 34.2% YoY in March, while industrial production growth decreased to 14.1% YoY. Again, serious base effects at play, but for retail sales that was stronger than economists had forecast.

Markets

The US 10-year yield has now fallen by 10 bp in the past week, the 5-year has fallen by 5 bp and the 30-year has fallen by 11 bp.

Some suggested the move was because foreign traders are snapping up the high yields on offer, but obviously they have had that opportunity for several weeks now.

The fall in real yields delivered more goods news for the stocks.

It also caused some USD weakness although, with the USD rising against the EUR and CAD, the DXY was unchanged.

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