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Is The Treasury Squeeze Over?
The "everything rally" is back in the US.
As discussed at length in the latest weekly, the confluen
Simple-minded thinking here:
10 year has gone from 5.0% to 4.5% (-ish), 3 mo was/is 5.3% (-ish). 3M/10Y was very inverted, then almost got flat.
Now bond bulls need it to re-invert, even more. Short end isn’t going to move any time soon.
Why should one bet on the curve returning to/near past inversion depths?
– Economy: are we still beating the “recession, imminent” drum?
– Inflation: how much future dis-inflation do we need, to bet on 4% 10Y?
– Term premium: is term premium going negative again? Uncertainty/risk to fade?
– Supply/demand: will Treasury keep trimming coupon refunding, or deficit shrink?
More simple-minded thinking:
Bond/stock directional correlation rather positive lately. So long as it’s +ve, adding bond exposure means increasing risk. Is this a good time to increase risk? If not, to add fixed income we have to sell equity. Which are we “better” at? Which looks more undervalued? Which has greater upside/downside?
Above is from a trading standpoint – which I assume characterizes most of the investors whipping in and out of bonds.
Different if one has a long term income strategy. In that case, how does the after-tax YTM compare to inflation? Assuming future inflation 2%, I see some bond classes with AT YTM up to 170 bp above inflation. How compelling it is to lock in a <2% real return, not sure.