Treasury markets in january 2011

Treasury Markets had a mixed month during the month of January. Markets sold off in the event of strong economic data and rallying when reports came less than expected. Notable events of this month are,




a) Stabilization talks of Euro

b) Rising inflation concerns fueled by food prices in EM world

c) Economic indicators confirm that US recovery is on track

d) Shiller index double confirmed housing is still in doldrums

e) Uprising in Egypt

f) FOMC ritual meeting



For the month of January, 2y yields are down at 0.54, and 10y rates are slightly up at 3.32 but 30y yields have risen to 4.53. This shows market is currently facing headwinds from fears of geo political tensions and inflation concerns at different sectors of the yield curve.

Most of the drivers of market in January will remain intact in the month of February. This means, there will be fluctuations of the interest rates at the current levels. Rates might not move far from current levels. 30y rates will respond primarily to the inflation concerns around the world.

Central Bankers at china, Brazil, India and other EM Countries are taking all measures to fight the inflation, hot money flows and appreciation of local currencies. Currently leaders at Europe are performing public act of consensus. I guess dollar index will see some lows here, as Euro will strengthen on this news.

Egypt is right now in flux and situation is getting volatile minute by minute. What will be the outcome is tough to predict at this outset. One scenario that I can imagine is new government taking the driver seat with still few controls in Mubarak’s hand. We should keep in mind what Saudi’s view on the Egypt’s uprising when predicting the outcome. It is not that easy to eliminate the power infrastructure in place. Overreaction in oil prices is a reason to sell rather than buy OIL. One possible spillover if it reaches to house of Saud then we should see the oil shooting to north of 100 and yield curve rallying to its September 2010 lows.



Volatility moved slightly in the long end. It fell more than 20 normal vols in the upper left swaption volatility grid. Volatility surface got steeper. One observation is payor skew is getting richer across the grid.