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BofAML: Buy Any Dip In Treasuries; Stock Bulls "Watch-Out"

Tyler Durden's picture




 

"Treasuries have turned medium term bullish," writes Macneil Curry in his latest reports, advising traders to "get ready to buy a dip," in bonds. At a minimum, he notes, BofAML expects yields to test the 2.691% area, but the most likely outcome is for a push to the multi-month range lows between 2.544% and 2.459%. Curry adds that he expected 5s30s to flatten to around 201bps and while they remain equity bulls he warns, "watchout" as seasonals turn much less constructive once February rolls around and the ratio of 3m-to-1m implied volatility is fast approaching the 1.20 level that traditionally coincides with complacency and market corrections.

 

Via BofAML's Macneil Curry:

Buy a dip in US Treasuries, the m/term trend is BULLISH

The Friday push to 2.816% in US 10yr Treasury yields completed an impulsive (5 wave) decline from the 3.049% high of Jan-02 and confirms a bullish medium term turn in trend. At a minimum, we expect yields to test the 2.691% area, but the most likely outcome is for a push to the multi-month range lows between 2.544%/2.459%. We could even see a test of the 2.420%/2.399% pivot zone before renewed basing and a resumption of the LONG TERM BEAR TREND to 3.45%/3.50%. Having said that, we cannot recommend longs HERE. After an impulsive decline a market will correct higher before the downtrend resumes. Wait for a pullback into the 2.905%/2.960% before entering into longs. PATIENCE WILL BE REWARDED.

Throughout this move the curve should maintain its strong positive correlation with yields (inverse correlation with price). Looking specifically at 5s30s, we look for a base into 205.2bps/201.0bps from which a counter trend steeping bounce is likely into 225.0bps/230.9bps.
 
Finally, we remain equity market bulls.

The ESH4 intra-day consolidation below 1846.50 is best described as a bullish continuation pattern, with a break of 1846.50 clearing the way for 1865/1876. However, seasonality and the slope of the volatility curve say that once these targets are reached, WATCHOUT.

Seasonals turn much less constructive once February rolls around and the ratio of 3m-to-1m implied volatility is fast approaching the 1.20 level that traditionally coincides with complacency and market corrections

 

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Tue, 01/21/2014 - 15:33 | 4352564 AccreditedEYE
AccreditedEYE's picture

It would appear that BoAML has Hedge Fund clients too.

Tue, 01/21/2014 - 15:40 | 4352592 Bearwagon
Bearwagon's picture

Would not be the first time such "harmless tries" spin out of control quite rapidly.

Tue, 01/21/2014 - 15:39 | 4352591 fonzannoon
fonzannoon's picture

If the 10yr goes into the 2.60's it's a short. 

Tue, 01/21/2014 - 15:44 | 4352610 Yen Cross
Yen Cross's picture

  BoAML has actually been batting pretty well as of late. I can see this taper scenario playing out as follows.

  Bond yields continue to creep higher into the Fed. meeting next week , and stocks trade sideways with a downward bias. The usd will probably also trade in this current range.

  The Fed. knows the equity markets are too hot and need to boil off a bit, and would be quite content with the treasury demand it would likely generate.( lower yields) A by-product of lower yields should be a softer usd as well.(equity positive)

   I think there's a strong chance the Fed. does cut another $10T next week, barring some abysmal event like a massive jobs/home sales miss later this week.

Tue, 01/21/2014 - 16:05 | 4352695 Boston
Boston's picture

YES! 

The Fed cannot allow Treasury yields to climb much higher, or even stay at these already elevated levels for extended periods of time. This would hit put huge pressure on annual deficits.

So what better way to collapse those elevated yields than to engineer, or at least permit, a serious correction in equities.

I've been loading up of Treasuries (5-10y) over the last 45 days, and will gladly start selling them after yields on the 10y fall below 2.5%

Btw, if, after I sell, yields resume their upward climb and reach anything close to 3.5%, then not only will I repeat this trade, but I will significantly raise the amount of Treasuries I buy. Rinse & repeat.

Tue, 01/21/2014 - 15:47 | 4352632 Spungo
Spungo's picture

Translation: we're short stocks and we're selling bonds

Tue, 01/21/2014 - 15:51 | 4352651 Dr. Engali
Dr. Engali's picture

So bank of U.S.S.A is selling treasuries and buying stocks.

Tue, 01/21/2014 - 16:26 | 4352832 Yen Cross
Yen Cross's picture

  What time frame ? I see lots of bond buying about 36-72 hours after the initial spike in yields, after the(presumed cut) announcement.

Tue, 01/21/2014 - 15:59 | 4352689 wisehiney
wisehiney's picture

Shiot. Now I gotta sell my tbonds.

Tue, 01/21/2014 - 16:19 | 4352796 PontifexMaximus
PontifexMaximus's picture

Seems, that the big names need the crowd to dump to go long(er)

Tue, 01/21/2014 - 16:25 | 4352826 anyways
anyways's picture

+1 Exactly.

Tue, 01/21/2014 - 16:22 | 4352817 silvermail
silvermail's picture

I very like fiat currency. Because they can still be exchanged for real money – Gold and Silver!

Tue, 01/21/2014 - 16:41 | 4352913 Yen Cross
Yen Cross's picture

   1BTC on usb-drive = 1toz of xau. According to Fonestar.

  I'm shopping for some survival gear. Any chance you know "anyone/someone" that want's to exchange for 1BTC usb drive for general survival necessities?

Tue, 01/21/2014 - 17:49 | 4353212 silvermail
silvermail's picture

If I hear the word "Bitcoin", I get a gag reflex.

Tue, 01/21/2014 - 20:17 | 4353732 starman
starman's picture

I thought unicorn bonds are good foheveah? Noh?

Sat, 01/25/2014 - 05:49 | 4366064 shawnmike
shawnmike's picture

Meanwhile the controlled sell-off in US equities is just that, completely controlled, and ready for the late day ramp. All while they go mad for bonds. Whatever, don't think anyone's jumping from windows on Wall Street just yet

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