US ECONOMIC OUTLOOK & COMMENTARY December 02, 2015

Paul Curtis Curtis914@cs.com

www.linkedin.com/in/paulcurtis4

US Yields Consolidating at Lower Levels Recent breach of US treasury 10-year yield above key resistance of 2.29% is quickly rejected.

US Economic Outlook / Commentary By: Paul Curtis on December 2, 2015

Spot On™ 1 11/09/2015

Recent Breach of 10yr Yield Above Key Resistance Quickly Rejected

Data Check and Commentary:

In late October, the 10-year US treasury rate surged higher from around 2.00% all the way up to 2.34% in less than two weeks. Much of this was driven by better

than expected economic data as noted by the Bloomberg surprise index. While the index has generally oscillated between -.55 and -.35 since June, there was an

unusually rapid move higher in late October, which took the index from the bottom (-.55) of the recent range right up the top of the recent range (-.35). The rapid

move up in the index correlated well with the sudden surge in the 10-year US treasury rate that occurred around the same time frame. About a week later, the

index began an equally impressive move back down to the bottom of the recent range bringing the 10-year treasury yield also lower. It should be noted that the

surprise index moved below zero at the start of the year and has yet to see a reading anywhere near zero (ie: economic data continues to come in weaker than

market expectations).

So where does that leave us now? Back in early November, following the surge higher in the 10-year yield, I commented that if the10-year could not get back

below 2.29% by 11/13/15 that additional weakness was likely. However, over the next few trading sessions, the 10-year did indeed move back below 2.29%

indicating a false breakout from the 1.81% to 2.29% trading range that has been in place since February 2015. This was further reinforced as yields remained

below 2.29% over the next two weeks.

Tracked Indicators (12 Period Moving Averages)

GDP 2.20%, Core PCE 1.50%, NFP 235k Source: Bloomberg & Paul Curtis

Bloomberg Surprise Index 9/1/15 12/1/15

Tenor Yld Yld Chg Level 10 Yr

1Y 0.36 0.47 0.11 3rd 2.51

2Y 0.70 0.91 0.20 2nd 2.35

3Y 1.01 1.18 0.17 1st 2.29

5Y 1.49 1.59 0.10 Current 2.14

7Y 1.88 1.92 0.04 1st 2.11

10Y 2.15 2.14 (0.01) 2nd 2.03

30Y 2.92 2.90 (0.01) 3rd 1.81

Source: Bloomberg & Paul Curt is

Resistance / Support

US Economic Outlook / Commentary By: Paul Curtis on December 2, 2015

Spot On™ 2 11/09/2015

Technical Analysis Update for the UST 10yr:

The quick rejection of the break above 2.29% on the 10-year yield has placed the long end of the US treasury market on much firmer footing. While we may not

be completely out of the woods yet (more on this below), price action is looking much more constructive than a few weeks ago and I still believe that the next big

move will be lower as incoming economic data continues to surprise to the downside.

However, we need to be diligent about closely monitoring developments should the 10-year break back above 2.29%. Since mid-2011, there have been five

times (see circled green areas on weekly 10-year chart below) when the 10yr rate moved right through 2.29% in a relatively short period of time. Three of these

moves (2011, 2012 and latest move) were quickly rejected by the market and the 10-year yield moved right back through 2.29% and rallied towards 2.0%. As

for the other two moves, the move in May 2015 lingered above 2.29% and eventually traded as high as 2.50% before turning back down and the move in July

2013 (the temper tantrum) blew right through the 2.29% and 2.51% area and eventually made a high near 3.0%. Clearly, the current price action looks much

close to that of 2011 and 2012 as opposed to the last two moves.

US Economic Outlook / Commentary By: Paul Curtis on December 2, 2015

Spot On™ 3 11/09/2015

In looking at the daily 10-year chart below, I am reasonably confident that if 2.29% to 2.35% contains any weakness, we will continue moving lower in yield as

part of a continuation pattern that began back in 2014.

However, it should be noted that since the low print of 1.6357% back in January, the 10-year has moved into a consolidating pattern (the consolidating trend lines

are highlighted on the chart below along with a shaded area of consolidation). A break on either side of this pattern will likely dictate the direction of the 10-year

over the next 3 to 6 months. Currently, the consolidated range is bound by around 2.35% on the upside and 2.00% on the downside and a break outside one of

these lines will likely lead to an additional 20 to 35bps move in the near term. Obviously, this levels will continue to narrow over time and we will eventually get

a breakout.

Strategy:

With the most recent move lower in the 10-year yield, we are smack in the middle of price action that has been consolidating since February 2015. The next few

days could prove pivotal, especially with non-farm payroll being released on Friday. Should the market continue powering down towards 2.0%, I would not

recommend fighting that strength. I would much rather, wait and see if there is a counter trade back up towards the 2.29% to 2.34% area (momentum measures

are starting to look overbought on price) and add duration at that point. To the extent we close the week below 2.00% and remain there for 3-5 days, there is a

good change that the 10-year yield will drop another 20-35 bps over the near term. On the flip side, a break above 2.35% likely tests the 2.50% area.