Tuesday, January 31, 2006

US Treasuries...are you kidding me? Sell them...toughest decision is which one to sell!

US Treasuries are bonkers. Bill Gross may run the world's biggest bond
fund, but that probably just makes him biased to be long. How he can
tell people that 10y Treasuries look good value at 4.50% (actually I
think they were closer to 4.40% when he put out his last monthly
update), when the FED is going to be at 4.50% this week, and looking
clearly like they're heading up further. I think on any economic
recovery in such a capitalist economy, you've got to be wary of calling
the top in the rate/economic cycle. I could understand if the ECB hiked
to far they could quickly push the European economy into recession
pretty quickly, but the US economy is incredibly flexible and will be
able to withstand rates of 5%+. That 4Q GDP at 1.1% will probably just
turn out to be a blip, stand back for continued economic growth through

So with the risk being that the FED keeps going more than the market has
priced in, where do you best get paid to be short if 2y/5y/10y
Treasuries all trade at ~4.50%? I've placed my bet today by shorting
10yr March Futures at 108.50 in £10 a tick (that's a 10y yield of
~4.53%), but looking at it now, maybe 5y is the point on the curve to
place that bet.

Anyway, I figure by going further out the curve, you hedge the risk of
the FED pausing too early...picture it, if Bernanke doesn't hike in his
first meeting in March, the market is gonna take that to mean he isn't
firm enough in controlling inflation (and inflation expectations) and
that curve is gonna steepen right up. And if Bernanke does hike to
4.75%, the market will still price in some probability of further hikes,
so seems to me that 10yrs will struggle to hold yields as low as 4.53%.
Sell it ASAP. Lets aim for 5%, but really, even if 10s went to
5.25-5.50%, they still don't look cheap if the FED was at 5.00%.


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