Wednesday, October 22, 2014

Flash Forward (9 Years-10 months) 10 Years; ‘Man, I’m so glad I grabbed those 1% Bunds in ’14!’

You spotted this note back in mid-August where I cautioned not reading too much into the traverse through the 1% Bund level, but to expect a more protracted and excited short covering event forthcoming.  I have added charts on Bund and 10 year Treasury yields and futures for guide.  I believe we have seen the short covering event I had projected; ‘…expect to see a significant short covering event. We are probably nearer that event than some imagine.’

Following the bearish reverse on Oct 15-16 that will mark a long time frame yield low, possibly for decades, there has been minimal backing and filling.  The inability to recover much of the recent Bund and Treasury highs, but instead grind lower further supports the conviction that the next significant move for yields is higher.  The hype and concern for imploding Europe has been exaggerated.  The ability for expected soft growth there to translate into grossly lower U.S. domestic growth has been overstated and the likelihood remains that the Fed shall move forward with normalization.

This normalization includes the completion of the purchase program announced at the October 28-29 FOMC meeting and the still anticipated policy rate lift-off in mid-2015.  As noted recently, the yield lows recently seen do not reconcile with this likelihood and the risk is toward higher yields, possibly coming more quickly or dramatically than easily imagined.   

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