Has the US Treasury bubble already popped?
If so, than it went quick and swift. We observed a huge rally in December of the US Treasury complex. All maturities rallied till mid-december, than traded in a quiet range til year’s end but went in a freefall as soon as the New Year set in.
How come? The most logical explanation seems to be a mix of end-of-year accounting factors and a supply-limited window for foreign investors. And now?
Maybe these bonds tumble further, but the situation is not clear enough to build on. Especially because everyone ‘knows’ that treasuries are overvalued. So a lot of plays on the short side (price wise) were set-up.
I don’t like crowded trades. Barron’s added to this feeling by putting up on his cover ‘Get Out Now’.
If everybody is yelling to get out, than we know that the probability the opposite will happen, wins in force.
That’s one thing.
Another important factor is the FED. It’s clear that the FED doesn’t want higher interest rates. And that it will use all means to prevent rates to go up. Hey, the US faces deflation and all economic data are pointing that way. So the FED will intervene. And that brings us to something else: the dollar.
If the FED buys Treasuries in order to keep rates low they will do so at the expense of the greenback. You have to print dollars if you want to buy UST’s in the market. A weak dollar is supportive for exports. And foreign investor inflows are disappearing. Another support for the dollar is fading.
One can develop different scenarios – the economy bounces, the economy gets worse or the economy gets much worse – but never emerges the dollar as a clear favorite.
Maybe it’s not UST that one has to short, but the dollar instead.
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