The Treasury market is trading slightly lower this morning, but yesterday’s momentum trade to the downside could indicate yet another test of the mostly symbolic 3 level on the 10-year note. Credit a rise in commodity prices for this, namely oil and metals. Our old friend the CRB Index has been steadily moving up this month, rising from 193.3 at the beginning of the month to its current 201.858 today, down from yesterday’s near-term high of 202.97. You have to go back to October of 2015 to have seen this index over 200. As a refresher, the CRB (Commodity Research Board) is an index or basket of commodities that takes the average of commodity futures prices each day, and then rebalances them on a monthly basis to form the index value. This index has largely been “off the radar” of many traders, mainly because its value didn’t move all that much and everyone seemed to know that inflation wasn’t present enough to cause the Fed to act. Well, it’s back and has generated enough attention to be the catalyst for higher long yields higher in the last few days. I am calling this a momentum trade because it has largely been driven by commodity prices. As we have learned over the last few years, those baskets can rise and fall at any time as certain short term factors cause spikes in prices, then settle back down into a more “normal” trading range. We would need to take out the 2.95% level on the 10-year note which traded there on February 21st before we would think that this has a real shot of breaching the 3% level. If oil prices fall back down, as they are this morning, then it will be difficult to believe that this trade has legs, but next week’s data, if supportive of higher rates, could push 10’s over the 3% barrier. Looking ahead, the economic calendar doesn’t really support a big move, mainly because most of the numbers are what I call “limited interest” indicators, and aren’t likely to cause a major market move. One thing that could will be the next week’s Treasury auctions. The Treasury will sell $96 billion of 2-year, 5-year and 7-year notes, and if they aren’t well-received, then it wouldn’t take much to get the longs to roll over, paving the way for a test of that 3% level. While I don’t believe that will happen, it isn’t out of the realm, but it would likely take more than a bad showing in the auctions to do so. Here are the things that we know: The Fed wants to keep raising short-term rates and the economy is just strong enough to keep its forward push going. The wild card, and it has been that way for 5 years now, is inflation. If inflation is ramping up, then there is very little else that could stop long rates from rising as well. Have a nice weekend!
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