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The latest interest rate outlook from PFG Best:

As alluded to last Friday, the USD saw a continued bounce in the first half of this week, although larger than expected, accompanied by profit taking throughout the stock markets and strength in the bonds.  It’s interesting to point out the decreasing swings in bond strength/weakness; we’ve been bouncing off of 117 and 118 1/2.  I see this occurring because of the perceived weakness in fundamentals across the globe and the fact that we’ve passed through some technical levels, most notably EUR/USD @ 1.50, which brought some profit taking into the USD fall.Look for continued volatility in the USD and bonds as investors balance two paradigms:

1) Growing perception that stimulus, albeit short-term, has been the main driver in making the economic recovery look much stronger during the 3rd quarter.  This, in conjunction with continued job losses and lack of available credit, finally seems to be turning investors thoughts towards a more muted recovery, thereby decreasing the likelihood for an increase in US interest rates in the near-term.

2) However, due to these expectations for a slower recovery, investors are beginning to reduce their risk appetite, which seems to be increasing their appetite for bonds and USDs.

Look for this push/pull to continue through to year’s end, with US interest rate expectations and the value of the USD continuing to be market drivers.  I wouldn’t be surprised to see cash yields approach 3.48-50% today with a strong GDP number, inline initial claims number and in-line earnings; look for 10 year T-Notes to approach 117 1/2.  If GDP comes in much less than expected or we have a horrible downside surprise in corporate earnings, which I doubt, look for a push up to 3.35% in cash yields, renewed weakness in the USD Index to just above $76, and 10 year T-Notes approaching 118 3/4.

Trade for today:

Sell 10 year T-Note (ZNZ9) near 118-06 and look to take profits just above 117-18 (place stop at 118-12)

Mark Melin & Eaven Horter
PFGBEST Research Team
mmelin@pfgbest.com, ehorter@pfgbest.com

Source: PFG Best