This page has been archived and commenting is disabled.

Goldman Tells Clients To Short US 10 Year Treasurys

Tyler Durden's picture




 

As of a few hours ago, Goldman's Francesco Garzarelli has officially told the firm's clients to go ahead and short 10 Year Treasurys via March 2012 futures, with a 126-00 target. While Garzarelli is hardly Stolper (and we will have more on the latest Stolpering out in a second), the fact that Goldman is now openly buying Treasurys two days ahead of this week's FOMC statement makes us wonder just how much of a rates positive statement will the Fed make on Wednesday at 2:15 pm. From Goldman: "Since the end of last August, we have argued that 10-yr US Treasury yields would not be able to sustain levels much below 2% in this cycle. Yields have traded in a tight range around an average 2% since September, including so far into 2012. We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00." As a reminder, don't do what Goldman says, do what it does, especially when one looks the firm's Top 6 trades for 2012, of which 5 are losing money, and 2 have been stopped out less than a month into the year.

What is Goldman's rationale for shorting 10 Years?

At this stage of the cycle, growth expectations are in the driver’s seat: The value of intermediate maturity government bonds can be related to expectations of future policy rates, activity growth and inflation, and a ‘risk factor’ highly correlated across the main countries. These simple relationships are captured by our Sudoku econometric framework for 10-yr maturity yields. In coming months, we expect effective overnight rates to remain close to zero in the main currency blocs (US, Japan, Euroland, and UK) and retail price inflation to hover around 1.5-2.0% – consistent with the forwards and central banks’ objectives. With policy rates and inflation ‘dormant’ at this stage of the business cycle, bond yields (and the 2-10-yr slope of the yield curve) will likely react mostly to shifts in growth expectations.

Bond valuations are already stretched relative to consensus growth expectations: Around the turn of the year, the outlook on economic activity was buffeted by cross-currents reflecting the adverse credit conditions in the Euro area on the one hand, and the upward revisions to US GDP growth on the other. Our Sudoku model, which helps us trade-off these shifts, indicates that 10-yr government bond yields are currently trading too low (to the tune of 50-75bp) when mapped against prevailing macro expectations. Taking into account the cumulative impact of the Fed’s security purchases, the degree of mis-valuation of 10-yr bonds is roughly the same across the main regions.

Bond yields are lagging the improvement in industrial activity seen since late 2011: The momentum of our Global Leading Indicator (GLI) for the industrial cycle bottomed out in the fourth quarter of 2011, although the revised series after the latest data show it steadily improving through the second half of last year. The sequential improvement has extended into this year. We observe that, since policy rates have been floored in early 2010, intermediate maturity yields have tended to lag improvements in the GLI by around 2-3 months. With central banks on hold providing ‘carry’, fixed income investors may have been wary to trade on early cyclical signals until these received validation in the early ‘hard’ data.

Real rates (and the 2-10 curve) could play catch-up with cyclical stocks: We have identified a relatively tight positive relationship between the relative performance of US cyclical stocks vs. defensives (as captured, for example, by our US Wavefront Growth equity basket), and the 2-10-yr slope of the Treasury curve. The departure from this relationship since the turn of the year is now eye-catching. Cyclical stocks have strongly outperformed the broader market, a move probably amplified by positioning, while bond yields have barely moved, underpinned by US domestic investors’ continued attraction for ‘carry’ strategies. At a closer inspection, yields out to the 5-yr maturity have continued to decline in real terms, and are now in deeply negative territory (-150bp in 2-yr and -100bp in 5-yr, near the early November lows), while 5-yr 5-yr forward rates are barely above zero. Our estimates suggest that forward rates (5-yr 5-yr forward) are now too low. Incidentally, the fact that a potential rise in yields would come from a depressed base and mostly in response to an improvement in growth prospects (which should also influence earnings growth expectations) means that a fixed income sell-off should not pose a threat to the equity market.

The FOMC statement could provide a near-term catalyst: According to a client survey by our US trading desk, around half of those polled expect the Fed announcement to ease financial conditions further, with only 12% expecting a tightening. Around two-thirds of participants believe the mid-point of the ‘central tendency’ range for the Fed funds rate at the end of 2014 will be 75bp (the forwards) or below. Finally, 72% of respondents expect the FOMC will announce a long-run neutral policy rate of less than 4%. These results are consistent with our impression that Wednesday’s announcement is now largely discounted to represent an ‘easing event’. With the data improving, treasury yields below ‘equilibrium’, current coupon 30-yr mortgage yields at all-time lows, and discussions on policy easing shifting to ways to support the improvement in the housing market more directly, such expectations may be disappointed, in our view.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 01/23/2012 - 08:30 | 2088158 Zero Govt
Zero Govt's picture

Best advise Goldman Sucks could give their clients: Get Your Money Out of Goldmans

They've been totally bankrupt for 4 years, their business is in terminal decline and Blankfein hasn't the brains to turn them around

Mon, 01/23/2012 - 08:39 | 2088175 HD
HD's picture

Can't you see Lloyd is just doing God's work?  Apparently, God really, really hates poor people.

Mon, 01/23/2012 - 09:49 | 2088317 Pladizow
Pladizow's picture

As long as there is a scent of QE on the horizon this trade will fail!

Mon, 01/23/2012 - 08:53 | 2088197 slaughterer
slaughterer's picture

"As a reminder, don't do what Goldman says, do what it does ..."  Can anybody here tell us what Goldman is really doing?  Or do we just have to infer that they are always doing the opposite of what they recommend?   One day, I fear, this "a contrario" approach will fail and Goldman will actually do what they say or recommend.  We need someone here to provide timely information into what they are actually doing--not just via their dark pools, but via their prop desks or what remains of them.   This game of fading every trade recommendation cannot succeed 100% of the time.   Sure, it works for Stolper, but not everybody at GS is as predictably wrong as Stolper.      

Mon, 01/23/2012 - 14:02 | 2089442 Canucklehead
Canucklehead's picture

Are you applying for the position of color commentator on the "Professional Checkers Channel"? 

I know there is a lot of money bet in those smokey backstreet checker palaces but it's difficult to identify the professional checker player.  They have an air of mystery surrounding their moves.

That being said, your move...

Mon, 01/23/2012 - 08:31 | 2088159 flyr1710
flyr1710's picture

time to go long treasuries

Mon, 01/23/2012 - 09:49 | 2088318 SWRichmond
SWRichmond's picture

Yeah, if ever there were a clear indication of insiders' knowledge of the imminence of QE3, it's Goldman telling its clients to short Treasuries.

Mon, 01/23/2012 - 08:33 | 2088162 lolmao500
lolmao500's picture

So we'll see 10y going down to 1.75%-1.5%?? This world is a fucking joke.

Mon, 01/23/2012 - 09:00 | 2088210 tarsubil
tarsubil's picture

I think Kyle Bass said it best when saying that Ben Bernanke is stuck in the keynesianism end point. It is going to 0%.

Mon, 01/23/2012 - 08:37 | 2088170 slaughterer
slaughterer's picture

Why not just go long MBS?   Shorting 10-years could result in hazards to your health near term. 

Mon, 01/23/2012 - 08:40 | 2088174 I should be working
I should be working's picture

Yeah that's a great trade, until the slightest thing goes wrong in Europe and you get hit by a freight train that will be priced into the market overnight. Who recommends these trades, and what grade are they in?

Mon, 01/23/2012 - 08:43 | 2088179 HD
HD's picture

Europe is fixed. CNBC told me so on a very special episode of "Mad Money"...

Mon, 01/23/2012 - 08:45 | 2088182 game theory
game theory's picture

I strongly disagree with their thesis. In the long term, definitely short Treasuries...but in the near term? No way.

But whatever. This story isn't about the correctness of an idea. It's about why there are even clients paying fees to this firm. The clients here have plenty of money to lose on trades and fees and they just need the brand distinction of saying they are with Goldman.  The next headlines:  "Goldman tells clients to send in naked pics of themselves."   "Goldman tells clients cigarettes are cool."  

Mon, 01/23/2012 - 08:51 | 2088194 Oh regional Indian
Oh regional Indian's picture

gamet, I think I just got it. These firms have clients because they use fancy terms like Sudoku Model (Haaaaah) and what, US Wavefront Basket...

Sure that must make people think that these guys are SHARP. 

I agree with your thesis too by the way. Operation Twist made Fed intentions on the short and long end quite clear.

Betting on the near term is just throwing brown goo on the wall and see which fool buys it as high art.

ori

au-kicks-a-joke-more-deep-symbolic-insights/

Mon, 01/23/2012 - 08:50 | 2088184 firstdivision
firstdivision's picture

Now buying Mar-12 132-00 calls.

FYI: 10Y is now at levels not seen since late Nov/early Dec

Mon, 01/23/2012 - 10:09 | 2088363 Comay Mierda
Comay Mierda's picture

looks like Goldman Nutsacks would like to buy some treasurys from you

Mon, 01/23/2012 - 10:11 | 2088374 Broker NotBroke
Broker NotBroke's picture

Good, more cheap treasuries for pttax to buy up.
How can they bet against qe3 in an election year?

Mon, 01/23/2012 - 10:52 | 2088507 Snakeeyes
Snakeeyes's picture

I keep hearing this too, but from others than GS. Economic growth would have to be strong enough and Europe would have to get its act together.

But look at the long run Real GDP for the US in the chart. We have been slowing since Clinton and I just don't see the case for growth >3% next year.

http://confoundedinterest.wordpress.com/2012/01/21/obamas-16-tons-state-of-the-union-address-you-owe-your-soul-to-the-government-store/

Mon, 01/23/2012 - 13:19 | 2089254 Apocalicious
Apocalicious's picture

Short TBT, short TLT. Capture decay & negative tracking error both ways. Long gamma if the world blows up...

Sun, 01/29/2012 - 12:48 | 2107242 GTG
GTG's picture

The Japanese thought their gov. bond/note yields could n't go lower for years after their crash in 89/90. Take a look at them now!  I expect the same in the US. Bernanke aint gonna trash the FED with more QE. (Forgive me if I'm wrong but as far as I'm aware money is not just printed it is created as a debt, a debt of the US government/taxpayer so it won't work anyway). I heard he's now doing road shows to give the illusion that the fed is open and transparent and to try and de-demonise the instituition and gain popularity... hahaha. I reckon he's habitually wearing brown underwear and slacks in aniticipation of the day of reckoning.

Do NOT follow this link or you will be banned from the site!