From Bond Vigilantes, Oct. 4:
The long-end of the US Treasury market has often been described as
giant anaconda: it draws little attention as it sleeps most of the time,
but the minute it wakes up, everybody around shakes. US 30-year bonds
don’t bite, but their moves can be as poisonous as they basically
determine millions of mortgage rates, as well as the price that
governments and companies around the world pay for debt. Is this market
about to spring higher in yield?
Until now, 30-year Treasury yields have generally made investors
smile – a 600 bps rally over the past 30 years has made money relatively
cheap, the term premium has collapsed, flattening the yield curve to
levels not seen since the 2007-08 financial crisis, as seen on the chart
below:
Investors are now watching this flattening with angst, fearing that
it may signal a looming recession: when previous flattenings turned into
an inversion in 2000 and 2006, a recession surely followed.
I don’t think this is the case now; more so, I believe we may see quite the opposite. This is because:
Technical reasons: 30-year Treasury yields could replicate what we saw in 10-year Treasuries earlier this year, and which I blogged about shortly before the market turned:
after four years trying to surpass the 2.64% level, the 10-year yield
finally breached through this level in February on the back of strong
hourly wage data – finally a sign of inflation after a decade of dormant
prices. This was a significant break of both the short and long term
trends....
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MUCH MORE
