As Bill Gross has been more than happy to demonstrate on several recent occasions, the recent sell off in US Treasurys has been sharp and violent, wiping out all year to date capital gains in the 10 Year in a few short weeks. The flipside to that is that this is not the first such headfake in the bond market, and it certainly will not be the last as David Rosenberg shows today with a chart summarizing all the "spasms" experienced in the 10 year Treasury since 2007. In fact, based on the average duration and move severity, the 10 Year sell off may not only continue for twice as long (on average it has been 49 days, and we are only 19 days in in the current sell off episode), but the final tally may be a further selloff well into the 2% range (the average decline in yield is 88 bps, double the 43 bps widening to date). At the end of the day will it make much of a difference? Very likely not: after all the deflationary implosion has far more to go before all the central banks engage in coordinated easing, and as a result superglue the CTRL and P buttons in the on position, leading to the final round in the global currency devaluation race.
Of course the Treasury market would sell off in this backdrop, and the 10-year note yield has already moved up more than 40 basis points from its nearby multi-decade low.
It was overbought then. It is oversold now... which is why it successfully tested the critical support around the 1.87% level late last week.
But let's not pretend we haven't seen these hiccups before. We have had no fewer than eight such episodes of 40+ basis point spasms since yields peaked in the summer of 2007. Each one did not last long and presented a gift of a buying opportunity for patient investors who have an ability to see the forest past the trees. Typically, these hiccups last 49 trading days and the yield rises an average 88 bps, with about three-quarters of the prior rally being reversed.
So can this last another month? Recent history says yes.
Can we see a move to the 2-2.25% band during this time? Recent history says yes.
But is this anything more than a blip in what is still a secular bull market in bonds? Again, recent history would say yes.
Finally, the definitve signal to go long the bond again will be just as Goldman says to short it, which as readers will recall, is precisely what happened the last time Goldman said it was a once in a lifetime opportunity to sell bonds and go long stocks. We all know what happened next.