You got it right in your next post. Fed controls short-term interest rates through open market operations. 10Y yields are more or less determined by the market price. What I don't understand is why everybody thinks that the long-term bonds have to drop. The alternative scenario is that long-term yields stay where they are right now, while short-term rates will keep rising. As a result we may see the flat or inverted yield curve, which will be an indication of a recession ahead. The problem is that the Fed have been advertising higher interest rates for a long time, and they have been persuading the banks to stop playing duration mismatch game (financing long-term assets with short-term liabilities). However it seems that a lot of banks did not get the message, and did not rebalance their balance sheets. If the yield curve starts to flatten, it may be a good trade to short certain banks, but picking the right ones will require some digging through the financial statements. DVB
I find it curious that a number of those bearish on bonds are also bullish on the risk of recession. Inverted curve is a pretty decent predictor of recession, seems it would make more sense for someone bearish on the economy to be short the short-long spread instead of short the long rates. In that scenario it might make sense to go after one of the banking ETFs. You might not catch the full effect of a major wipeout, but there should be enough knock-on effect to the rest of the sector to make a nice score regardless.
But long-term yields obviously do not stay where they are. In fact they drop day by day. Is there a certain plan behind all this ?
Weeeeee! Under 4% on the 10 year. Is this a short squeeze for all those who wanted to short bonds? Are ya still shorting those things? Are ya gonna learn that we are in the new economy where money is cheap, inflation is low, growth is moderate and I sleep in til noon every day. Could things get any better than this?
An alternate explanation is the spread is headed for inversion and the economy for recession. If that's the case, equities should start their usual "six months of prescience" between now and April. Recession or not, yields this low with the amount of currency printing over recent times doesn't strike me as a particularly healthy sign.
MARKET TALK: Long Bond Falls As Reissuance Possible 1301 GMT [Dow Jones] Cash 30-yr bond plummets, down 4 points with yield up 24 basis points to 4.75% as Treasury says considering whether to start reissuing 30-yr bond, will let markets know Aug 3, option may be semi-annual bond as of Feb 2006.
Which version of the Dow Jones News are you using? I'm subscribed to the commodities basic package only and they mention this the first time 3:14. When I saw the slide I looked for some news, but could not find any. ET is a good source ... Many Thanks Bernd Kuerbs
IMHO, its a way for the Fed to get longer rates higher, which they have labelled for months a "conundrum". Jawboning only works so much.