Yesterday we predicted it was imminent, and sure enough, adding insult to injury for any muppet who rode the "once in a lifetime" opportunity to buy stocks and sell bonds, Goldman just hit the stop loss on its 10 Year Treasury short, after getting stopped out in its Russell 2000 long two days prior.
Concerns over a slower pace of US and Chinese growth have compounded an escalation of tremors in the Euro area’s sovereign and banking space, with Spain this time at its epicentre. Dragged lower by the strong ‘flight-to-quality’ rally in their German counterparts, US 10-yr nominal government rates are back at 2% - a level below the central bank’s CPI inflation objective. Our tactical trade to be short 10-yr Note futures (TYM2), initiated on March 14 at 129-17 for a target of 126-00, hit last night the stop-loss at 131-16 (the position had reached a low of 127-23 on March 20). We are therefore recommending closing the position with a loss of around 2 points.
Looking ahead, we continue to forecast US bond yields heading higher. Our view is supported by our valuation work, suggesting that even on our macro forecasts calling for a modest recovery, and accounting for the Fed and BoE’s direct interventions, intermediate Treasury rates should be trading at 2.5%, led by a steepening in the real term structure (10-yr real rates are trading again close to their all-time lows of -30bp). Our measure of the global bond risk premium is now extremely depressed. Euro area tensions undoubtedly continue to represent an important headwind to our directional stance. Yesterday, however, we recommended to take profits in short positions in Spain against Italy. With the price action exhibiting all the hallmarks of a self-reinforcing pessimistic dynamic, the chances of a policy reaction have in our view increased.
It is only logical that the 10 Year can proceed to collapse now as Goldman is finally actually selling.