Looking through the haze of the headlines there hasn’t really been much to change in the last month.
US Treasury yields are currently in a diminishing trading range with the last week seeing some yield curve flattening as the longer end of the curve saw declines in yields after the relatively strong demand seen in the auctions. There are rumours of strong central bank demand for long dated Treasuries and these seem to have China as the rumoured major purchaser last week.
This tighter trading range has led to declines in historical volatility and this to a certain extent has seen declines in Implied Volatility levels as well.
Now with the flattening of the curve last week, the momentum is starting to swing around again and if further flattening were to occur I would expect a gradual rise in the Implied Volatility level again.
For the moment it appears that the pressure that had been coming from investors looking to simulate MBS has abated. This allows for the 10yr Swaps Implied Volatilities to rise in line with the flattening.
The fall in Interest Rate Implied Volatilities has been supportive for risk markets- but the levels of Implied Volatilities remain elevated and it looks likely that these levels will if anything begin to rise again.
As such credit markets continue to look historically expensive.
And yet again Hard Commodity prices are beginning to decline which will gradually feed through into inflation expectations.
The QE3 effect on the inflation markets is, as expected, lessening day by day.
So whilst the last year has seen a breakdown in the close correlation between the Inflation Breakevens and the Nominal Treasury markets, any fall in inflation breakevens from the current level will be supportive for the Treasury bond market.
So I remain long duration here– The ranges should still hold for the time being that I stated last week, US 10yr at 1.75%-1.60% and 30yr at 2.97%-2.77%, which suggests that at the moment we are almost in the middle of that range
