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The Yield Spike Everyone Is Expecting
Since everyone is expecting it, maybe it won't happen?
Any insecurity about the US government's imminent fundraising capacity should be resolved, now that the 7 year note auction is complete. While direct bidders (foreign central banks?) were a record part of the competitive bid (17.2%), US Treasury managers can sigh in relief that the hard part of the week is over.
This week's auction was a beneficiary of a massive amount of debt rolling off mid-February (recall Feb 15th is a maturity day), around $130B (of the $180B total raised). Which of course means marginal extra treasury supply was only around $50B. But that is a twice a year benefit, and by no means is the Treasury going to witness smooth sailing going forward, as we have an upcoming 10 and 30 year auction of substantial size without the liquidity benefit of old maturing debt to roll over.
When the Agency MBS quantitative easing program finishes at the end of March, it would not be surprising to see the market try to find a new value (higher rates) for agency debt (also likely substantially affecting other debt of longer duration). On the bright side, those who were itching to get out of their agency positions have now had sufficient opportunity to do so (for one full year amidst $1.25T of purchases). Perhaps that means Pimco has nothing substantial left to sell into the market. Regardless, like we are watching the market testing the Euro over this Greek debt crisis, it isn't a wild improbability that a yield spike, perhaps temporary, will also be witnessed.
After this yield adjustment occurs, perhaps the "free" markets will have a better feeling for what yield area is safe for entry into long maturity debt. Because of this, perhaps the direct bid percentage (of much recent concern) of these auctions will fall. Again, I am still suspicious there if there is enough capital out there to soak up US Treasury demand at these yield levels. Thoughts?
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I'm not expecting a yield "spike." I'm expecting yields to rise steadily and continuously for years and years. No "spike" to it.
Whatever is obvious, is obviously wrong. I'm waiting to short bonds at the opportune moment. That moment will reveal itself in the fullness of time. Be patient.
23 / You write: "...I am still suspicious there if there is enough capital out there to soak up US Treasury demand at these yield levels. Thoughts? We agree with your premise, overall.
However, we think from a short-term technical standpoint (in place through March into early April), coupled with current uncertainty in Europe (specifically, Greece & PIIGS), the treasury markets should maintain a bid. Starting mid-April into May, we think your general thesis will exert itself as treasury yields will begin to rise.
The question one has to ask themselves, is what is your investment timeframe and directional trading bias? Our bias is to short 30-year bond, but from higher price levels (121/122 in June10 contract), (or 4.10% in yields). Good luck.
You are probably on to something but there is no rocket science involved imho. If you examine the Treasury Bond market going back many years you will see that yields have been double topping (and prices bottoming) in late May through early August almost like clock work. Personally I do not believe there will be a "spike," at least not one that will take out the high reached on June 10 last year (which, by the way if you blinked you would have missed it).
What I like about your March-April timeline is that it will probably coincide with the bottom of the next leg down in equities (low 900s anyone?). I have been holding the 30yr since last July and would definitely add on any spike approaching 5% given the powerful deflationary backdrop.
I'm curious how you intend to short the long bond? I know people buy TBT but I have been told that if you hold this ETF you are responsible for making the interest payments on the underlying bond.
Hettygreen is spot on IMO; look at a chart of the price of the 10 year: rising channel now in place. I think we see a 3% yield before a 4 handle.
Yeah, here are some thoughts for you: this post sucks.
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A little confused by opening with maybe we won't have a yield spike
and closing with it isn't a wild improbability. Yields reflect risk.
Agencies and Treasuries getting riskier every day...
test
TLT basing for some time in the high 80s. Meanwhile a descending wedge is due to soon meet that base. A breakout above the multi-month downtrend would be bullish for rates and would mirror the DXY breakout of months ago.