If the Fed is going to hike in September, someone forgot to tell the 10Y:
The persistent suppression of 10Y yields stems from a number of factors not the least of which is the market essentially calling the Fed’s bluff, but also from foreign investors seeking safe yield although as we’ve noted elsewhere the dollar funding crunch as expressed by cross-currency basis swap spreads has virtually eaten up the yield pickup for anyone wanting to FX hedge their exposure:
(Charts: Deutsche Bank)
All of this has SocGen “frustrated.” Here’s why:
“As for markets, month-end looms and with Friday’s non-farm payrolls following on hard behind, we may see a reflective mood rather than dramatic action. But it’s the tiny Treasury
range that catches the eye and suggests volatility will be kept firmly anchored, investors will struggle to resist the siren call of yield and emerging markets, and the dollar’s unlikely to fly TOO high. Short GBP/USD is my staple diet at the moment, but otherwise EUR/USD is just range drifting, I haven’t had the fall in USD/JPY to buy so I’m just frustrated, and it will be the employment data on Friday that determine whether we can get broader G10 trends underway into Autumn, or just stay with the yield-hunt.”
Be careful what you wish for, USTs, JGBs, and Bunds are all ripe for a VaR shock.