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Citi Warns Of "Deja Vu All Over Again" For Treasury Bond Bears

Tyler Durden's picture


The Fed's announcement Wednesday to begin the tapering of its bond buying program (to our surprise) has been followed by a spike in the US 10 year yield; however, Citi's FX Technical group cannot help but feel that we have seen this dynamic play out before.

Via Citi FX Technicals,

Previous endings of the Fed’s bond buying programs have seen a quick spike in yields that proves to be short-lived as the reality of a still weak global economic backdrop takes hold. If history is any indication, it would not surprise us to see the US 10 year yield top out over the next few days before turning lower towards 2.40%-2.47% and potentially continue declining towards 2.00%.

The pattern here is rather clear: introductions of unsterilized bond buying programs by the Fed lead to a sell-off in Treasuries (rally in yields) while the ends of these programs lead to a rally in Treasuries (decline in yields). (We exclude Operation Twist as it was a sterilized program which did not actually expand the Fed’s balance sheet).

It is clear to us that the introduction of QE leads investors to sell Treasuries (classic buy the rumour sell the fact) and rush into riskier assets on the back of the search for higher yield and the implicit market (Greenspan/Bernanke) put that promotes complacency and financial asset inflation.

Once that market put is removed, though, the economic backdrop becomes the bigger driver of investor sentiment. At the end of both QE1 and QE2, the US recovery was still very weak and the European sovereign crisis was taking hold.

While the current economic backdrop is certainly better than that seen during those periods, we still remain in an environment where:

– The US recovery remains weak by historical standards as unemployment is still elevated and the quality of jobs created is poor, core PCE is near historical lows, corporate earnings growth is based on margin compression rather than sales growth, the housing recovery is tepid at best and 30 year mortgage rates remain at the highest levels seen since mid-2011.


– While fears around the European sovereign crisis have been put on the back burner, the reality is that none of the structural issues which have affected Europe have actually been resolved.


– The recent spike in yields has shed light on the weakness of many emerging market countries that had previously been highly favored. In our view, going forward, emerging market investments will likely be done selectively and with more caution as investors adjust to the removal of the Bernanke put. This could put pressure on many of the fundamentally weaker countries which rely on foreign financing. In line with our views expressed earlier, this could lead to flows back into the USD and US Treasuries.


– Oil prices remain high and show no signs of declining in the near term. This (along with higher yields) can serve as a drag on the economy, the negative feedback loop of which would also suggest lower yields going forward.

On the back of all of this, we would not be surprised to see one last move higher in the US 10 year yield over the next few days, potentially as high as 2.95%-3.00%, the converging downward sloping trend line (see previous page) and the 2013 high. However, such a move would, in our view, likely be the medium-term top and if history is any indication, a move lower in yields from there would be likely, especially given our concerns with respect to the global economic backdrop.

While we do not necessarily expect a move similar in magnitude to that seen at the end of QE1 or QE2 given both the pace of tapering and the slightly better economic backdrop, a move towards 2.40%-2.47% seems likely (those levels are the converging 200 day and 200 week (not shown) moving averages, the October 2011 and 2013 highs and the October 2013 lows).

The 2.47% level also serves as the neckline of a potential double top and a break below there would confirm the pattern, which would then target just below 2.00%. As we have previously pointed out, The US 10 year yield has historically had a tendency to top out while posting a double top.


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Fri, 12/20/2013 - 12:46 | Link to Comment Lewshine
Lewshine's picture

Oh yeah, what would make yields conveniently drop at this time??? Is it not the same dark hand that constantly carves out Ben's ideal exit day after day?? NOT ONE ASSET CLASS IS LEFT TO ITS OWN DEVICES...NOT ONE!!!

Fri, 12/20/2013 - 12:59 | Link to Comment Againstthelie
Againstthelie's picture

A stop of the risk on trade and a rush to "safety" would drop yields. The risk off theme would be back.

Fri, 12/20/2013 - 13:17 | Link to Comment Boston
Boston's picture

Yup....totally agree.

I bought the 10y in Aug when it yielded 2.8-2.99 and sold it when yields fell below 2.6 in Oct. I'm buying the 10y again now.

This is a trade, not an investment. 

Fri, 12/20/2013 - 13:19 | Link to Comment onelight
onelight's picture

Gd pts there - I wonder too if it involves a reaction, however short-term, to perceptions of the Fed having hogged the UST market, taking so much of what others in the market use for collateral, such that now the latter see fit to grab some, at least for a time...and that makes for a trade alright.

Fri, 12/20/2013 - 13:56 | Link to Comment Kayman
Kayman's picture


And the Fed balance sheet ?  To infinity and beyond....

Don't need no real economy when the Fed monopolizes capital formation.

Fri, 12/20/2013 - 13:15 | Link to Comment American34
American34's picture

There is one thing they missed. This whole analysis assumers another QE will begin at the end and again that it will succeed.

Fri, 12/20/2013 - 13:19 | Link to Comment El Vaquero
El Vaquero's picture

I'd be surprised if we either don't maintain $75B/mo until the wheels come off, or taper more to the point where the wheels come off and we see the great un-taper. 


As for bond yields going down, yeah, I can see that.  QE has propped up the stock market.  Once that goes away, a lot of investors are going to want "safety."  That'll only work for so long, however. 

Fri, 12/20/2013 - 12:47 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

Numerical mumbo jumbo, but a presumption of weakening economy does portend falling yields.

OTOH, the GDP number today does not say weakening economy.  Have there been any Q4 GDP upgrades in response to today's number?

Fri, 12/20/2013 - 12:50 | Link to Comment Mad Mohel
Mad Mohel's picture

These numbers are full of fuck. Take them with a grain of salt.

Fri, 12/20/2013 - 12:50 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

Personally, I take them with a grain of poor Christmas retail sales being seen and a need to goose them.

Fri, 12/20/2013 - 12:51 | Link to Comment Divided States ...
Divided States of America's picture

This is insane...its so damn obvious the market is being propped up this entire morning...for everyone down tick, it will be followed by 10 upticks....but some parties will definitely unwind by days end.

Fri, 12/20/2013 - 12:57 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

Stop trading.  Period.

Fri, 12/20/2013 - 13:04 | Link to Comment Divided States ...
Divided States of America's picture

Stopped a while ago....and I agree...stop assisting with pumping blood into the beast within. I just cannot stand the TV with CNBC right in front of me at work.

Fri, 12/20/2013 - 13:15 | Link to Comment The man with po...
The man with pointy horns's picture

Simple; stop watching TV channels. The only reason why I have a TV is to play video games.

Fri, 12/20/2013 - 13:45 | Link to Comment greatbeard
greatbeard's picture

>> stop watching TV

What's a TV?

Fri, 12/20/2013 - 14:12 | Link to Comment The Wisp
The Wisp's picture

I haven't owned a TV in over 30 years, it's amazing what people talk about and do with their lives, just sit in front of a Box

Fri, 12/20/2013 - 13:01 | Link to Comment disabledvet
disabledvet's picture

small caps have been choking the chicken for a couple of months now. the trading has always been pretty weak and most of the big money (and all the Federal Bank "reserves") just sits there in cash. just waiting on Wall Street's "forward guidance" of "always beating expectations" even though profits have been slowing for well over a year now to finally be made real. a huge move down in copper prices should the trick as "some clown in China sitting on a billion tons gets forced to unload."

Fri, 12/20/2013 - 13:01 | Link to Comment FieldingMellish
FieldingMellish's picture

What is the point of Wall Street recommendations again?

Fri, 12/20/2013 - 13:01 | Link to Comment dpr10
dpr10's picture

what:)))they think this game will go on forever..

Fri, 12/20/2013 - 13:22 | Link to Comment 1835jackson
1835jackson's picture

Disagree here. 10y cannot keep dropping forever. And in the case with any inverse realtionship, what goes down must come up. 

Fri, 12/20/2013 - 14:12 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

The 10 year yield is ROFLMAO at the GDP number.  now down to 2.89%.  It could wind up lower than Friday last week, despite taper.

Fri, 12/20/2013 - 13:32 | Link to Comment Yancey Ward
Yancey Ward's picture

There is one big difference here than when QE1 and QE2 ended- "Taper" has yet to actually occur- the Fed only announced that it would reduce to $75 billion in January, and the pace of reductions would take until August to actually end QE3- assuming it ever actually ends (which I asume the opposite)

However, I tend agree that the 10Y can't easily go above 3% with the short rates where they are.

Fri, 12/20/2013 - 13:35 | Link to Comment DR
DR's picture

Yes, banks are still getting a juicy yield spread....

Fri, 12/20/2013 - 13:34 | Link to Comment Yancey Ward
Yancey Ward's picture

And, again, with the action the last 3 days, what is considered an inverted yield curve in the age of ZIRP.

Fri, 12/20/2013 - 13:44 | Link to Comment DebtSlaveZombie
DebtSlaveZombie's picture

FYI.  The 10 year didnt spike.  It's up to 2.90 from 2.88 (pre-taper levels).  Considering everything, its unreal the 10yr is relatively unchanged.  It may drop to 2.50 in the near term.  If that happens, S&P 2000 very soon.

Fri, 12/20/2013 - 14:15 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

2.5% would mean Q4 and Q1 GDP south of 1%.

Fri, 12/20/2013 - 13:53 | Link to Comment moneybots
moneybots's picture

"While fears around the European sovereign crisis have been put on the back burner, the reality is that none of the structural issues which have affected Europe have actually been resolved."


Funny, we have that same problem in the U.S.  Financial fraud still rules.


Fri, 12/20/2013 - 14:32 | Link to Comment eddiebe
eddiebe's picture

Call it whatever you want, I call it MANIPULATION.

Fri, 12/20/2013 - 16:05 | Link to Comment Youri Carma
Youri Carma's picture

Frankly I expected the 10-Year stay rather high but it is sort of happening now indeed US 10-Year Yield 2.89% Now from 2.96% high today.

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