Via Nedbank, h/t Mehul Daya
The Fed and other non-US Officials (Central banks and Private) hold more than 50% of the US treasury market.
As the FX reserves start to decline and the Fed starts to reverse the QE process, it will probably put upward pressure on the US bond market.
Our fair value model indicates these pressures will push the US10yr up to 3.00%. The latter level is also the major support line coming all the way from the late 1980s.
However, unfortunately, every time the market has moved up to this trendline since 1987 the world has experienced financial stresses.
At the start of the year the short position in the US10yr was 3 standard deviations below trend.
This reversed to a 3 standard deviation long position, which in turn started to reverse over the last day or two.
As we wrote here on Thursday evening…
The big question is what happens in a “tantrum” scenario where a rate shock effectively flips the script and rising yields are no longer seen as a risk-positive sign of reflation optimism, but rather as a risk-off signal tied to central bank hawkishness?
A related question is this: has the “tantrum” threshold for yields move materially lower over the past couple of years? This scatterplot (although it’s a bit dated) suggests the answer to that question is definitively “yes” (note that the visual depicts rates-stock correlations):
In other words: 3% on 10s is probably more than enough to cause a tantrum redux…