Are we at the perfect buy for 10 yr and 30 yr right now?

Discussion in 'Economics' started by scriabinop23, Dec 14, 2007.

  1. Want to start a little discussion...

    I think this is the perfect entry for a long duration entry into the treasury market. 10 yr at 4.24%, yield curve projecting quite a bit of economic bullishness as it is (short duration is at 3%). An flattening of the curve takes long yields from 4.24% -> 3%, a 30% capital appreciation move. A slight inversion at 2.5% takes us to 40% capital appreciation. Lots of room for fear and economic bearishness here.

    If bonds are a sell here, then you are saying that wheat, crude, and soy are going higher from here and STAYING higher from here. Additionally you are saying that dollars will flow INTO equity markets away from risk free assets as these commodity costs continue their ascent.(so with $150 crude, no flight to quality) I just don't buy that

    My idea in a nutshell: The mere fact that global consumer is being noticeably affected by the current runup in commodity prices is a tell that a continuation of this commodity run is not sustainable - demand destruction will occur in a global context to offset intermediate supply issues. Upon a falloff in commodity demand, inflation #s should actually reverse. This should ease yield expectations in long duration notes (and in addition to so much cash in the system, this is perhaps why long duration yields never made it to 70-80s oil shock levels)

    And of course, it doesn't hurt that the fed will keep printing money.
  2. Not a bond trader, BUT my long term macro prediction is that 10 yr bonds are NOT a buy.

    I believe increasing risk premiums for U.S. debt/exchange rate fears coupled with liquidity preference make 10 yrs. seem overvalued at the moment. What if OPEC nations start buying euronotes, as some have threatened?

    I don't know where the 10 yr is going to go yield wise. Neither does anybody else. Point is, there is good enough reason to believe that the 10 yr is overvalued as there is reason to believe it's undervalued. Risk/reward wise, it's just not a good trade.

  3. nice alias and good points. But the eurobond idea provokes the response that there would likely be a great arbitrage there. If there is euronote yields are sufficiently lower (due to increased petrodollar buying), then I'd imagine that would make US notes look all that more attractive, especially since our growth and inflation rates are very correlated.

    Eurobond 10 yr at 4.31 and US note at 4.24 right now. Euro 3 month bill at 3.75, US 3 month at 2.74.

    There's something there.. US note trading at a premium doesn't spell fear of US dollar assets to me (nor does the USDX price movement today). Despite petrodollar countries talking smack on US dollar, they aren't managing to affect the prices yet (quite to the contrary). I think there might be more risk premium in the eurozone economy here.
  4. ^That's my point-the spread on U.S. and Eurobond may close...Right now, U.S. 10 yr. sells at a premium. I'm saying that if we continue with mismanagement of our currency, this could change.

    In the current stagflationary environment, I wouldn't want to be stuck with an instrument that barely matches inflation after taxes. Also, even if the curve does flatten, and let's assign the prob. at 50%, you're taking a 30% capital appreciation-over how long for this scenario to play out? I think you can find an equity return with greater probability of more than 30% appreciation within the same time frame.

    Of course, Steinhardt went long the 10 yr. when interest rates were ~18% and made one of the best trades ever. But w/an 18% yield, you have more room for reversion to the mean than at 4.24%. When you have a historically typical yield, I'd leave bonds to the pro traders and try not to guess where the yield curve is going.
  5. So you would prefer an instrument that loses 20% or more of its value after taxes?

    Paying a few pips to wait for a better opportunity ain't the worst thing in the world.