FT Alphaville " "Lower lows ahead" That's the title of a Barclays note predicting that yields on the US 10-year will hit 1.25 per cent in Q3. At pixel time they're at 1.45 per cent. The rationale given in the note (emphasis ours): Economic data have been consistently surprising to the downside, there has been no resolution of the fiscal cliff yet, proposed bank capital rules have been stricter and the euphoria over the EU summit has faded. The rally in rates that began in late March has continued, and 10y yields are again flirting with historical lows. Some have argued that this is entirely the result of European sovereign risk having caused a flight to quality, so if the situation stabilizes, rates could sell off dramatically. We disagree. We believe that even without a disorderly event in Europe, US Treasury yields should drift lower over the coming months. The team also expects the 30-year to move down to 2.25 per cent. You know how we feel about predictions, and we remain confident that the US recovery will continue and at some point accelerate despite an obviously disappointing Q2 - just might not be for a few quarters. So just take the above as another sign of the times, and it's certainly possible that the market is pricing in some probability of each of those four factors above, plus the global safe asset shortage, continuing to influence yields. Who knows. (We needn't ruminate long on the issue of yields falling on worries that there could be tremendous fiscal consolidation at year-end. That used to be ironic; by now it should be obvious.) Anyways, this morning's putrid retail sales report for June, which has analysts reducing their estimates for Q2 GDP, is yet another data point - the June payrolls report and May PCE inflation were others - that seems likely to spur the Fed to do more at either its meeting at the end of this month or in September. Here is Citi's Steven Englander on the relevance of this morning's report: In July of 2010, core retail sales went to flat on a three month moving average basis, and with today's release core retail sales have averaged a small negative over the last three months (Figure 1). Moreover, the sharpness of the decline echoes what we saw in Q2 2010 (as does the sharpness of the decline from euphoria to despair). Why might core retail matter so much? Note how tight the range was from end 2010-to early 2012. The "core" retails sales number takes out volatile components such as autos, gas and building materials so breaking out of a range is a more important signal when it is driven by stable components rather than erratic ones. With core inflation a steady 0.2% m/m, the stagnant core retail sales number suggest that 2/3rds of the US economy is going nowhere fast, keeping in mind that retail sales are nominal not real. The bar to QE3 is higher than for QE2, if only because there is considerable skepticism that balance sheet expansion will accomplish much, when both the 10yr and 309 yr Treasury have dropped 100bps since early March. However in 2010, the 10yr yield dropped 100bps from April to early August and 150bps to end-August and it didn't stop the Fed from QE2 (although then as now the QE expectation may have been priced in even before the Fed knew it was on the table). QE is far from a done deal, but the prospect that final demand is slowing fast may be concentrating the minds of FOMC members. Something to think about ahead of Bernanke's semi-annual monetary policy report to Congress, which begins Tuesday. More on this later. This entry was posted by Cardiff Garcia on Monday, July 16th, 2012 at 17:53 and is filed under Capital markets. Tagged with Yields.