arigolden
Short

US10y to Stay Above 2.4% With a Year-end Target of >=2.5%

TVC:US10Y   US Staatsanleihen 10 Jahre
I see strong of support for the 10y at just above the key 2.40% level:

-Current 10y levels have finally crossed over the trend-line going back to July – strong near-term indicator is broken which suggests 10y support at/above 2.40%.

-Interestingly, the ~2.40% yield level is the .618 Fibonacci level which we have also crossed over – this is a key Fib level which also indicates support at 2.40% with the next resistance level at ~2.47% or the .764 Fib level.

-The ECB cannot be discounted either as any meaningful uptick in European rates will likely help push US rates even higher.

Target: US 10y at or above 2.5% by the end of the year.

Kommentar: US10y yield vs nominal GDP (both in quarterly terms) in terms of spread have averaged about 108bp back to 2008 (10y yield minus GDP).

It recently printed -64bp.

If we assume Trump's target GDP growth of 3% and the FED's 2% inflation target, then a 5% nominal GDP target places the 10y yield at 3%+ (approx around 3.5%).
Kommentar: A quick macro update given the incredible move in the US10y...

Perhaps 4 hikes up is the max that the terminal Fed Fund's rate is allowed to go - i.e. a max of 2.25 to 2.50%. There is just not enough inflation to warrant hikes higher than that. If 4 rate hikes do indeed materialize, and the velocity of the back up in the 10y yield continues, I believe the 10s30s curve will go negative -15 to -25bp by the end of this year and will see the 5s30s eventually go flat and negative - that is when equities will likely walk into the door of the correction phase of this last part of the cycle.

Central Banks and asset managers have a lot of concentrated bond risk - central bank's can likely hang longer than most as rates go higher, asset managers are at the whim of their clients/investors. Duration has lengthened significantly so it takes a very small uptick in rates to create losses.

For now increased UST issuance has been focused on the front end - if infrastructure spending materializes and warrants heavy issuance on the long end, then long-end rates should march even higher.

Biggest risk in my opinion to the bond market is a bear steepener. Everyone gets wounded in this scenario and most will get killed. Helmets on, spears in hand.
Thanks, beside a relative call 10-30 and 5-30, what would be your expectation for the 10y yield within 2018? 3% 3.5%?
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Any Update? what do you see happening in the next months?
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arigolden lu1977hk
@lu1977hk, ...to provide some fundamental context, we hit 2.5% this week off the back of US Tax reforms looking positive for growth and inflation. This bond sell-off started in Europe as Bund yields moved higher on news that Germany will issue more debt than expected in 2018 - as I mentioned in my 3rd bullet point above in my idea, an uptick in European rates will likely see an uptick in US yields.

My update would be that since we broke above the 2.47% Fib line, this will most likely act as a support in the near-term. I still believe looking at the pace of the 5s30s flattening over the last year, in 2018 we will see a flatter curve and possible an inverted curve by 2019.
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