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Why We Are Watching The 10yr US Treasury Yield Very Closely Now

Rareview Macro

Rareview Macro
Visit: Rareview Macro

The last time the March 2021 Eurodollar (EDH1) was trading at 99.80 was in the first half of May when the prospect of negative interest rates was a dominant market theme.

With the recent virus spread, the risk of prolonged social distancing has increased significantly. This is leading investors to ask what part of the “alphabet” is the economic recovery now in – U, V, W, etc.?

One way to answer that question is to marry what the Federal Reserve forecasts and what the US 10yr Treasury yield is implying.

Very recently, the Board of Governors of the Federal Reserve released a paper called: Assessment of Bank Capital during the Recent Coronavirus Event. In this paper, the Fed shows the type of recovery scenario and what 10yr US Treasury yield that shape is associated with.

For example, 10yr US Treasury yields are telling you that sentiment is at the bottom of the “U” shaped scenario and 5 bps away from entering the “W” scenario.

Why do you have to pay attention to this simple framework? Because after sucking investors back into risk assets over the last 45 days, a “W” shaped scenario is maximum PnL duress.

10-year us treasury yields are relative to federal reserve scenario
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