Divergent monetary policies
At its December 2016 FOMC meeting, the US Federal Reserve raised interest rates by 0.25%, bringing the range of the federal funds rate up to 0.50% to 0.75%. The US economy (IWM) (SPY) has clearly begun its tighten its monetary policy with more rate hikes coming during the course of the year. This has led the 10-year US Treasury yields to soar. From a 1.8% in November 2016, the 10-year US Treasury bond (TLT) (IEF) now yields around 2.4%.
On the other hand, yields on the Japanese 10-year government bonds of JGBs stand pinned at near 0%, while the doves continue to fly over Europe (VGK). With inflation and growth still low, we’ve seen the ECB president Mario Draghi extending the quantitative easing program in place.
Global arbitrage may cap the 10-year treasury yield at 2.4% to 2.6%, says Bill Gross
Hence, for the US, “global arbitrage effectively caps the 10-year at 2.4% to 2.6% levels,” noted Bill Gross in his January 2017 Investment Outlook. For the first year that Donald Trump is in office, Gross does see the 10-year Treasury move higher driven by an unclear fundamental perspective. In the later years, however, the influence of technical indicators would become stronger as a strong 3-decade long downward trendline sported by the 10-year Treasury would increasingly be at the risk of being broken.
For 2017, Gross finds the 2.6% yield level as critical for the 10-year Treasury, a breach of which could result in a “secular bear bond market.”