For about 15 days between the end of August and mid-September the action in the treasury bond market deviated from our model comparing bond yields to the change in the size of the Fed's balance sheet. Our model simply calculates the three month difference in total assets held by the Fed projected out through the beginning of 2015, when the three month difference will fall to zero.
From the end of August to mid-September long-term T-bond yields rose even as our model predicted they would continue to fall. Since mid-September, though, gravity seems to be reasserting itself on yields as they have fallen nearly all the way back in line with our Taper model.
Yields have yet to make a new low on the year (the 30-year is still 4bps off the low and the 10-year is still 7bps off the low), but our Taper model, if it is still valid, suggests new lows are not far off.
