The 10-year U.S. Treasury bond yield is up to 2.13% on Feb. 20 from this year's low of 1.68% on Feb. 2. It started the year at 2.17%. What happened to trigger such a fast and nasty reversal? Here is a partial list:
(1) Payroll employment data were released on Feb. 6, showing not only another solid gain in January payrolls but also big upward revisions to the previous two months. The federal funds futures market immediately discounted a Fed rate hike around midyear and another by the end of the year. The FOMC minutes cited above seemed relatively dovish, as I discussed last week, but the meeting occurred the week before January's robust data were released. Subsequently, several Fed officials have said that they favor starting liftoff at midyear.
(2) German yields fell early this year on weaker-than-expected new orders data for November, released on Jan. 8. This year, the German 10-year yield fell to a record low of 0.31% on Jan. 30 in response to mounting fears of a Greece exit and the worsening of the Ukraine crisis, along with deflationary CPI readings and anticipation of QE.
However, on Feb. 5, we learned that December factory orders rose 4.2% month-over-month, led by a 4.8% increase in foreign orders. This augurs well for exports, which rose to a record high during December. Eight days later, Germany's latest real GDP release showed a gain of 2.8% (seasonally adjusted) during Q4 2014. On Feb. 20, Markit reported that the Eurozone's Composite Output PMI rose to 54.3 during February from 53.5 during January, the highest in seven months. The German bond yield is now back up to 0.36%.
(3) Japanese yields also have risen recently on better-than-expected economic data, and expectations of more to come. The 10-year government yield fell to a record low of 0.21% on Jan. 19. Real GDP rose 2.2% (seasonally adjusted) during Q4 2014, according to the Feb. 15 release. On Feb. 18, we learned that exports rose 1.8% month-over-month and 17% year-over-year during January. The 10-year bond yield is now up to 0.37%.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.