It would take Yellen or inflation to break out of this trading range

Published Wed, Aug 24 201612:04 PM EDTUpdated Wed, Aug 24 201612:56 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

The 10-year yield is stuck. For the entire month of August, the bench mark Treasury's yield has pretty much stayed between 1.50 and 1.59 percent. "It's very odd. There's a tremendous amount of nervousness and skepticism, but behind that is a lot of complacency, and everybody feels there's a central bank put," said Andrew Brenner, global head of emerging markets fixed income at National Alliance. This is what it would take to break the range. Source: FactSet Some strong statement from Fed Chair Janet Yellen (she speaks Friday), or some signs of inflation, strategists say. But it's possible neither of them will happen soon. "Yellen's speech has held the markets prisoner. They can't go anywhere. They're in this little tiny space with bars around them, and they can't move until she speaks," said Peter Boockvar, chief market analyst with The Lindsey Group. Traders say it's unusual for the U.S. sovereign benchmark to trade so narrowly for so long, but one factor driving it is overseas buying as investors move away from negative-yielding sovereigns in Europe and Japan. "It's been dead in the water. I think what it means is there's a lot of uncertainty. Even the Fed has started to admit they're real uncertain in terms of where things stand with the economy, where things stand with inflation. They're getting conflicting data," said Boris Rjavinski, director of rate strategy at Wells Fargo. "They're getting pretty good data form the labor market, but they can't seem to get inflation anywhere near their target. Plus, there's a political uncertainty from the election," he said. "From Brexit, (the range) was 1.45 to 1.60 which is extremely narrow," he said. Yellen would have to sound more hawkish than normal, or even dovish to change the trend of the 10-year. Fifty-four percent of the participants in the most recent CNBC Fed survey expect a neutral Yellen when she speaks in Jackson Hole, Wyoming, on Friday morning. "I think the Fed has gone to extreme lengths to try not to surprise the markets," Rjavinksi said. "That's part of the reason why there's been so little flair in their speeches. I doubt they'll try to guide yields to any particular target. If anything, she recently said in a press conference that low yields reflect low inflation expectations." The market sees the most likely time for a rate hike this year as December, with the odds hovering around 50/50. Recent comments from New York Fed President William Dudley and Vice Chair Stanley Fischer, both close to Yellen at the core of the Fed, were taken as hawkish. So there's some speculation that if Yellen leans in any way, it will be hawkish and she would be assuring the market that the Fed is on a path to hike rates this year if the economy is strong enough. "If she sounds dovish, people will say how can she not agree with Fischer. If she agrees with Fischer, then she's talking about a September hike. She either agrees with Fischer and Dudley or there's a little fissure at the top," said Boockvar. But even a more hawkish Yellen may not be enough to lift the 10-year yield much, since the bond market has leaned against the Fed. It may be the 2-year yield that responds most, driving a flattening of the yield curve. "Right now the 2-year is at 76 basis points. Post-Brexit, it was at 55 basis points. That will be most sensitive to what she says, more so than the 10-year," said Boockvar. "It's not just what happens here; it's what happens in Japan; it's what happens in Europe." Boockvar said Japan could actually set the tone in September depending on how its central bank addresses negative yields when when it meets and reviews policy in September. Rjavinksi said even if the monthly employment report for August is strong, the expectations still may not change for a Fed rate hike or move the 10-year. The bond market has been focused on inflation, since that is one of the Fed's dual mandates, and it has lagged the Fed's 2 percent target. The PCE price data the Fed watches is being released Monday, and the release of the Producer Price Index on Sept. 15 and Consumer Price Index the following day will be important, he said. The Fed next meets Sept. 20 and 21, and Fed watchers say if it wants to hike at that meeting, it will have to take big steps to move expectations, including hawkish words from Yellen. The CNBC Fed Survey, released Wednesday, found that 60 percent of respondents say the central bank lacks a blueprint for deciding on interest rates, with just 24 percent saying they do and 16 percent unsure.

Janet Yellen

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The 10-year yield is stuck.

For the entire month of August, the bench mark Treasury's yield has pretty much stayed between 1.50 and 1.59 percent.

"It's very odd. There's a tremendous amount of nervousness and skepticism, but behind that is a lot of complacency, and everybody feels there's a central bank put," said Andrew Brenner, global head of emerging markets fixed income at National Alliance.

This is what it would take to break the range.