Before you shut down that terminal for the year, hoping that the year is - mercifully - finally over, you may want to consider that according to former Lehman trader and current Bloomberg macro commentator Mark Cudmore, the Christmas pain trade is about to be unveiled, and it will be especially painful for all those short Treasurys. As Cudmore warns, with ten-years stuck in a 2.3%-2.43% range for the past seven weeks, "the arguments are adding up for a violent downside break during the weeks ahead."
Here are his arguments why, as laid out in Cudmore's latest Macro View :
A Treasuries Rally May Be the Christmas Pain Trade
Post-Fed price-action suggests Treasury bulls may stampede while traders are in holiday mode.
Ten-year yields have been stuck in a 2.3%-2.43% range for the past seven weeks. The arguments are adding up for a violent downside break during the weeks ahead.
Many investors were punting for a hawkish turn from Yellen this week. There was indeed a subtle, but important Fed shift, but it was dovish. The committee raised growth projections, that also incorporated tax reform, without raising the dot plot.
The implication is that they’re struggling to explain “transitory” low inflation. Maybe there’s an increasing acceptance that either the Phillips curve is broken or that they should be paying more attention to structural disinflationary pressures from technology, globalization and demographics.
And investors seem to have overlooked the fact that it’s still very far from certain that the tax bill will be passed before year-end. Come January, the Republican majority in the Senate shrinks to one.
With Trump having already been celebrating and promoting its imminent passage, there will be real disappointment for markets if the tax package is delayed. And the problems are mounting up, from Rubio’s recent objections to McCain’s health concerns.
With optimism priced in everywhere and complacency across assets, traders may be wrongly positioned and vulnerable to a low- liquidity surprise.
This day last year, in the wake of a Fed hike, the 10-year Treasury yield reached the highest level of the last three years before tumbling 21 bps from that peak by year-end. Fundamentals may be adding up to a repeat performance.