In last week's post, my expectation was that global bond yields would continue to increase and the 10-year Treasury would test resistance at 2.24%. Bond yields did increase significantly early in the week, at one point reaching 2.27% before pulling back to approximately 2.10% after release of the employment numbers.
Janet Yellen's comments about stock and bond market valuation were also a major factor in the early week rate rise, along with the significant sell off in German bond yields. German 10-year yield increased from a low of 0.05% on April 17th to 0.73% on May 7th. Yellen warned that she saw the stock market as highly valued at these levels and that the low interest rate environment was causing some distortion in the bond market.
The most concerning piece of data for bonds and the stock market last week had to be the continued disappointing productivity data. This data raises questions about the ability for corporations to sustain high profit margins in the future.
This week, I expect choppy trading action in both the U.S. stock and bond markets. The ranges that I have written about remain mostly intact and no discernible trend exists. Until a material breakout occurs on new news, the contrarian trade within the trading range remains a good short-term trading strategy.
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