Article / 27 June 2016 at 5:11 GMT

3 Numbers: Is the 10-year Treasury yield headed for a new low?

editor/analyst /
United States
  • Welcome to week one of post-Brexit economic and financial uncertainty
  • Some data releases will still reflect the pre-Brexit world
  • Will Eurozone money supply growth continue to ease in May?
  • The flash US Services PMI data offers an early clue on the macro profile for June
  • The benchmark 10-year Treasury yield may slide close to an all-time low this week
By James Picerno

Global markets will continue to sort through the implications of Brexit today. The 1,000-mile journey starts with a first step, but for now it's all a speculative mess. Where this is headed is anyone’s guess in the wake of Friday’s shocking news that the UK has voted to leave the European Union.

The only thing for sure is that we're stuck with a high level of uncertainty, courtesy of the tortured negotiations that will take place between Britain and Europe on the exit plan in the months to come. There's also the unknown of how Brexit reorders politics on the Continent. Welcome to the first full week of regime shift.

 The UK vote will embolden populists into trying to repeat the result elsewhere. Frexit, Spexit, Bye-gium or Czech-out anyone? Fasten your seatbelts for a bumpy ride. Photo: iStock

Otherwise, it’s a slow day for scheduled economic releases, with the main event for Europe centered on the European Central Bank’s monthly report on money supply. Later, Markit Economics publishes flash data for the US Services PMI in June. Meantime, keep an eye on the benchmark 10-year Treasury yield, which plunged on Friday. Will the potent return of a risk-off bias in world markets continue to push the 10-year yield even lower this week, perhaps to a new all-time low?

Eurozone: Money Supply (0800 GMT) How prepared is the Eurozone in terms of monetary liquidity for weathering a post-Brexit world? The ECB  assured markets on Friday that it is "closely monitoring financial markets" and "stands ready to provide additional liquidity, if needed, in euro and foreign currencies."

Meanwhile, let's have a look in the rearview mirror for an update on how the mild deceleration in liquidity growth has been proceeding via M1 money supply, over which the ECB has direct control.

M1 was still rising at a relatively high rate—9.7% for the year through April. But the trend has been slowly but persistently easing for much of the past year. Presumably the downshift in the pace of monetary liquidity was predicated on the assumption that the Eurozone recovery had taken root. Indeed, first-quarter GDP for the euro area improved to a 0.6% quarter-over-quarter rate, the strongest rise in a year.

But it's a new world order after Thursday's Brexit vote. Note too that Q2 GDP growth for the Eurozone is expected to decelerate to 0.35%, according to’s update on Friday. Will Q2 projections slide further in the weeks ahead, once the realities of a post-Brexit world sink in? If so, expect a commensurate revival in M1 growth in the second half of 2016. Today's numbers, by contrast, will reflect assumptions of the pre-Brexit world.


US: Services PMI (1345 GMT) Last week’s monthly update of the Chicago Fed National Activity Index revealed a sharp slowdown in economic activity in May. The three-month average for this multi-factor macro benchmark tumbled to a four-year low. Although the negative 0.36 reading is still above the level that marks the start of new recession—negative 0.70—it’s clear that the macro trend has stumbled.

An early hint at what’s coming in June, however, offers a ray of hope that a modestly firmer trend may be developing. Markit Economics last week advised that its flash estimate of the US Manufacturing PMI for this month ticked up to a three-month high. Although the PMI is still only modestly above the neutral 50 mark, Markit’s chief economist said that the fractional bounce is “welcome news.”

Maybe so, but it’s still too early to make assumptions about June’s macro profile, especially based on only a single number. Today’s update for the US Services PMI will help pare back the uncertainty a little. The stakes are higher for this sector, of course, because services represent the dominant source of economic activity. As such, the recent slowdown is worrisome.

The Services PMI eased to 51.3 in May, which is dangerously close to the neutral 50 mark that separates growth from contraction. Note, too, that this index briefly dipped below 50 in February before posting a modest rebound in subsequent months.

Given the weak May data via the Chicago Fed index, all eyes should be on today’s PMI report for deeper insight on what to expect for the June macro profile. Given the events of last week, however, we may have run out of scope for dismissing weak macro numbers.


US: 10-Year Treasury Yield The rush into safe-haven assets on Friday was a dramatic reversal from the previous days, when a risk-on climate convinced the crowd to sell Treasuries and drive up rates. On Thursday, the benchmark 10-year yield rose to 1.74%—a three-week high, according to daily numbers from But as the Brexit news arrived on Friday morning, the waning appetite for Treasuries reversed course and the 10-year yield tumbled to 1.57% on Friday—not far from an all-time low of around 1.40%.

The immediate implication, of course, is that the Federal Reserve will put talk about a rate hike on ice for the foreseeable future. Meanwhile, the crowd this week will be wondering how low the 10-year yield can go.

“It's too early to assess whether we will have a negative interest rate environment,” the managing director at Janlyn Capital told Reuters on Friday. “However, given the knee-jerk global response in the markets, it would seem that low interest rates are here to stay.”

Ultimately it’s all about the economic data. With a hefty new dose of uncertainty swirling about, markets are struggling to reprice expectations. The main worry is that the global economy suffers a large negative shock. Deciding if that’s a real and present danger will take time. If the crowd’s inclined to assume no less, the 10-year Treasury will slide, perhaps setting the stage for a new all-time low.

By contrast, a relatively stable 10-year yield that holds around the 1.60% mark or higher would suggest that sentiment is leaning toward a comparatively optimistic scenario.

But stability may take to emerge until it’s clear if the eurosceptics will take a page from the Brexit victory and try to replicate the results in France, Germany and elsewhere. Frexit anyone?

Fasten your seatbelts—it’s going to be a bumpy ride.

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– Edited by Robert Ryan

James Picerno is a macro analyst/editor at Follow James or post your comment below to engage with Saxo Bank's social trading platform.



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