Was Thursday’s Treasury Bond Sell-off Overdone?

By Walter Kurtz, Sober Look

The 10-year treasury note yield has climbed above 1.9% Thursday – a level we haven’t seen since last spring.

The selloff in treasuries was triggered by the FOMC minutes, with several members targeting the end of 2013 or earlier as the completion (or at least a slowdown) of QE3. According to Barclays, this sell-off was an overreaction.

Barclays Research: – The FOMC minutes showed few members willing to continue asset purchases until about the end of 2013 and several others considering it appropriate to slow or stop purchases well before the end of 2013. We believe at 10y real yields of -62bp, well above the levels even before the QE3 announcement, the market has over-reacted. Even if the Fed were to stop purchases by middle of 2013, it would have bought ~$460bn in 10y equivalents, which argues for much lower real yields.

Ultimately, the FOMC’s approach to asset purchases will be set by the employment numbers (see discussion). The December employment report (Friday morning) will therefore be quite vital in setting the trajectory of long-term rates.

10y treasury futures price intraday (source: barchart.com)


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Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  1. Curiously enough, technically the charts were screaming weakness in bonds well before the FOMC minutes were disclosed. As soon as December 18, bonds became bearish technically:


    Furthermore, the BLV (long-term bond term bond ETF) / GLD (gold ETF) ratio is very close to turn bearish, which means stronger gold and weaker bonds.

    All in all the technical picture for bonds is bleak.


  2. I completely agree with Manuel. Any rally in the bonds/treasuries should be viewed as a shorting opportunity.

  3. I disagree with Manuel and eagle. The technicals for gold are worse than they are for treasuries. Treasury bonds had a similar breakdown last March ’12 and subsequently recovered. As Cullen says, even longer term bond yields are like a dog on a leash, with the leash held by the Fed. The Fed implied that they will end their bond-buying. But if 30 yr mortgage rates continue up and the housing recovery slows, don’t be so sure that the Fed will resume bond buying. Treasury yields are related to GDP growth. If Europe continues to slide deeper into recession and the increase in payroll taxes slows US growth to 1% or less, then T-bonds will rally.

  4. Debt Ceiling, spending cuts anyone? Trade the fear. Increasing the ceiling and increasing spending polls horribly with the public. Obama is gonna struggle selling that bill of goods. Markets will get uneasy on the outcome.

    The trade couldn’t be more obvious. DOLLAR long Gold and treasuries short. I wouldn’t touch gold til after the fear unleashes its damage to portfolios.