Tuesday, October 14, 2014

Consider Treasury 5-30 for Flat on 'toe in water' approach to overbought



Those seeing excess in the bullish Treasury advance and suspect the marginal shorts have already capitulated should consider the prospects for the Treasury 5 year-30year yield spread to flatten from here.  The spread has moved from below 140 basis point wide to above 150 over the last 10 days as market participants have judged the 5yr as having been too severely punished relative to a new sense for the prospects for economic growth.  The longer term prospects for this 5-30 yield curve are for still flatter levels, in line with our view that the Fed maintains its portfolio and continues to give term-premium deflating guidance.  There may still be a lingering bid for the 2yr Treasury as thinking persists that the Fed will not be able to lift rates until the second half of 2015 at earliest.  The 5 year horizon however is certainly able to capture the meat of the Feds accommodation removal.    
 

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