ahh lets all just dream for a minute of a world where japanese bonds yield 3-4%. what would the USD, US 10year rates and global stock markets look like then? can you imagine the volatility that would accompany the journey? Q1
One thing to consider when forecasting interest rates is the spilling of liquidity from Japan. The BOJ recently said that the period of super loose monetary policy will be over soon. It must be considered as a possible bearish factor for US government bonds and could have huge implications for JPY/USD.
I wouldn't take money off the table yet on the ZN side of the spread. There has been size paper selling the last few days in the ten-year (not just stops). Someone sold about 35,000 ten years today on the screen (think Goldman) and was a buyer of two years on the break. Everyone has now reversed into the steepener in the US curve for MASSIVE size (several times Goldman has done 10,000 lot FOB's). I was talking about this a few weeks back that it seemed the large paper was not a buyer of the ten year and especially the bond. It doesn't seem like they are done pushing the back end of the curve lower yet. Now everyone is worried about inflation and a possible slow-down of housing which Gross relates to not being good for long-term Treasuries. Looking another few months down the road, say that the housing market has cooled or even begun its price depreciation, and the fallout from high oil prices translates into increased inflation across the board, the Japanese are again thinking about raising rates, and the Euro economy is still in the crapper, and if somehow manufacturing makes a comeback. The ten year could be somewhere between 4.50-5.00% with the Bund at 3.00-3.50%. I would definitely look at this spread as a very long-term play and continue rolling the position. In my opinion though value could be seen in the 4.50-5.00% level for the tens when these inflation pipe dreams come to reality and we realize that asset-price depreciation may put the cap on price inflation. Also, to add to ZFtraders statements the Japanese accounts at the CBOT have been huge buyers of puts for quite some time now, obviously a hedge to long treasuries, and has rolled into the Novemember 109 strike as of late in the ten year.