US Treasury yields recover on hawkish comments from Fed’s Kaplan

The US Treasury yields recovered previous losses on Monday following hawkish remarks made by Dallas Fed President Robert Steven Kaplan (non-voter for 2016) in Beijing. Markets now look ahead to a greater flow this week, highlighted by the July employment report on Friday.

The yield on the benchmark 10-year Treasury note rose 4 basis points to 1.501 percent, the yield on 5-year note jumped 3 basis points to 1.064 percent and the yield on short-term 2-year note climbed 2 basis points to 0.687 percent by 12:30 GMT.

The Fed’s Kaplan said a September rate hike is 'very much on the table' if data supports it, though it's too soon to jump to a conclusion. He also said that the Dallas Fed's forecast for the US GDP growth this year is still a little less than 2 percent. Brexit will have just a modest or marginal impact and the US consumer will be strong in 2016, he added. We foresee that this seems unlikely after the latest GDP data, and Fed Funds futures discount a sub-20 percent chance of such a hike at the next FOMC meeting.

On Friday, The advance second-quarter US GDP reading increased +1.2 percent, well below market expectations for a +2.6 percent result, as compared to the revised +0.8 percent reading seen in the first quarter of 2016 (previous was +1.1 percent).

Alongside the weaker than expected headline result, this report clearly reflects the mixed tone of data seen throughout the quarter. Given the magnitude of the inventories decline seen in the advance release, we see this potentially signalling positive momentum on this front in 2H16.

Meanwhile, the S&P 500 Futures trading up 2 points at 2,170 by 12:30 GMT.