Thursday, August 14, 2014

Flash Forward 10 Years; ‘Man, I’m so glad I grabbed those 1% Bunds in ’14!’



Hard to imagine someone terribly happy to have secured 1%, 10 year yields I suppose.  Our minds just do not want to go there.  However, the reality for today is that Europe is not humming along and there is a distinct possibility for ECB to take in an inventory of sovereign debt (QE).  This along with geopolitical developments has pressured yields and today the Bund touched below 1%.   

In the States, we were/are getting geared up for a lift-off from ZIRP toward mid-year 2015.  The strangest part of these expectations may be that mid-2015 was discussed for lift-off way back in 2012.  At the September 13, 2012 FOMC meeting the Fed statement offered; ‘In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.’ Before September ’12, The Fed had been saying ‘…at least through late 2014.’  So, it has been nearly 2 years that the Fed has been delivering a fairly consistent message. 

However, timing as well as the road toward ‘normalization’ is now shrouded in the fog of uneven progress toward Fed employment and inflation goals and questions about steps and usage of monetary policy tools to remove accommodation.  Until that is sorted out, heightened uncertainty around these variables will result in greater volatility in rates and asset markets and will as well negatively influence economic growth at the margins.  As such, the default for Treasuries shall be toward lower yields; until such time as greater clarity toward Fed policy intent is recognized.  Counterintuitively, the default switch would still be turned off even if a strong consensus view of Fed policy intent is toward a slightly more accommodative stance. 

Technically, TYU has created a bullish engulfing as a result of trade on Tuesday/Wednesday.  We are not surprised to see this bullish continuation development and believe it points toward continue advance.  Today’s advance currently reaches toward, but as yet, not beyond Friday’s high (126-17+).   We had previously marked August 8th as important as it marked a new high settle since May.  Its significance was confirmed by trade the next session where on Thursday a week ago, TYU advanced nearly half a point open to close.  Because last Thursday was the strongest settle (TYU4) since last October, we note that the three sessions following that advance were unable to remove even half of that sessions gain-another sign of likely continued bullish price action. 

Many would have looked at the bearish reverse signals on Friday as an important turning point.  We have instead advised that still lower yields were likely forthcoming.  Given heightened expectations for a reversal from Friday’s misread technical development, we might expect to see a significant short covering event.  We are probably nearer that event than some imagine.     



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