Lumber Decline Signals Lower U.S. Yields: Technical Analysis

A drop in the price of lumber may signal the yields on the 10-year Treasury note will fall as the Federal Reserve ends its $600 billion Treasury-purchase program in June, according to Nomura Holdings Inc.

The benchmark yield may decrease to as low as 3.25 percent after the Fed completes the program known as quantitative easing, George Goncalves, head of interest-rate strategy at Nomura, said in an interview. The firm is one of 20 primary dealers that trade directly with the U.S. central bank. Lumber’s decline last week signaled a broader drop in commodities and a slide in yields this week, he said.

“All commodity boats rose together, and now they are settling down and will be driven by underlying fundamentals,” Goncalves said. “Once the Fed stops, we’ll see yields stabilize or head slightly lower.”

Ten-year notes yielded 3.50 percent yesterday in New York, up four basis points, or 0.04 percentage point, in the yields’ first rise in three days. Lumber futures for July delivery fell by the exchange limit of $10, or 3.6 percent, to $266 per 1,000 board feet on the Chicago Mercantile Exchange, and the Thomson Reuters/Jefferies CRB Index of 19 raw materials was at 360.66, up 0.3 percent.

Lumber has tumbled 22 percent since touching $340 per 1,000 board feet on Jan. 4, the highest level since May 2006. The CRB Index advanced for the past three weeks and touched 368.96 on April 11, the highest level since September 2008, before sliding 1.5 percent through yesterday.

‘Very Quickly’

“Lumber tells you how weak the commodities market could be,” said Goncalves, who noted the link in a note to clients on April 13. “When there’s the need to re-price, it happens very quickly. The bond market doesn’t follow one for one, but it will take away some of the inflation concerns, which is supportive for the bond market.”

The price of lumber and the yield on the 10-year note have maintained a correlation since the Fed began its Treasury-buying program in November to spur economic growth, Goncalves said.

“If we have less stimulus and the economy is not on a strong footing, then we may not be able to sustain inflation,” Goncalves said. “We see signs of growth slowing here and overseas, including China, and that will curtail how high commodities can go.”

Yields on 10-year Treasury notes have climbed from 2.59 percent on Nov. 2, the day before the Fed announced the $600 billion program, to a high of 3.77 percent on Feb. 9, the most since April 2010, as investors moved to other asset classes.

The yields will trade between 3.25 percent and 3.5 percent through June, Goncalves said.

Wholesale costs in the U.S. rose less than expected last month, gaining 0.7 percent compared with a 1.6 percent increase in February, a Labor Department report showed yesterday. The median forecast in a Bloomberg News survey was for a 1 percent advance.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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