Thursday, October 9, 2014
Setting 10 Year Treasury 'Cyclical Yield Low'!
The Treasury 10 year yield advance from the late August 2.34% low was spirited, but we advised that it was not likely this year’s ‘cyclical yield low’. Since 2010, we have had some remarkable success in discovering and benefiting from a pattern that has emerged in Treasury yields, namely that for a period as long as 6 months, a cyclical yield low can be recognized and expected to hold subsequent tests. It appears a similar experience is still available this year.
We are currently in the process of determining this year’s ‘cyclical yield low’. The pace of treasury advance has quickened and the level of confidence held by market participants about the sustainability for continued above trend growth has recently been diminished. Positioning is off-side for a lesser economic expansion and continued Fed (think Evans and Kocherlakota) warning for adverse reaction to too early a Fed move toward ‘normalizing’ monetary policy are beginning to find greater heeding.
The pace of Treasury advance is now more spirited than can persist over the short-run. There has been 10 new session highs since the September 19th low without a 3 session pause and we should recognize that at least some level of short-term overbought conditions exist. As noted earlier, positioning is still inconsistent with more moderate growth, at or near 2.25% trend, and any upcoming reports that indicate a sub-3% real GDP growth carry a risk that a more protracted short covering event may ensue.
For guide, we would advise those who had purchased Treasury or Eurodollar futures for tactical consideration and expectation that a new ‘cyclical yield low’ had not yet been achieved, lighten up on this position, leaving a large minority of that position in tact till some technical development indicates a bearish reverse is forthcoming.
Thanks for your support. I am active in searching out a position with an investment manager. If you should be able to recommend a strong and reputable firm that could benefit from my services, I would be delighted to learn. Martin McGuire