Here Is The Chart That Explains Why Rates Are Rising In The US
The easy answer is - well, its those dumb money 'safe' investors finally rotating from bonds to stocks; but what about fund flows provides any evidence for that reality. Alternatively, we suggest, the recent (and somewhat market-unexpected) pop in macro data (surprising to the upside) has seemingly provided a Goldilocks for equities (growth is rising and even if it drops back, Bernanke's got our back) and the inverse for Treasuries (growth is rising and if that's the case then Bernanke's Bond Buying extravaganza is over - mark 'em down). What is stunning to us is the incredibly tight correlation since LTRO2 between macro data (trend and beats/misses) and 10Y Treasury yields. While correlation is not causation, discussion of the macro thesis is strong top-down and suggests more than one person believes this correlation. Our concern - what dominant data is this macro strength based on - NFP/Claims beat? Retail Sales beat? (consider the controversy of the seasonal adjustments in both and what that would do to the macro data index.
Citi's ECO Surprise Index tracks not just overall direction of macro data but the tendency to beat or miss expectations (i.e. a falling and negative trend is macro negative and indicates it is deteriorating faster than economists believe; and vice versa)
So - simply put - if you believe that recent retail sales and jobs-related gains are sustainable or more accurately not the result of in-extremis seasonal adjustments, then continue to sell the Bond... if however, you are a little more skeptical and suspect some of that seasonal-affectation will unwind, then covering that short (or buying the bond) seems reasonable here (especially as economists mark up their macro expectations and provide greater divergences from unseasonally adjusted reality).
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