Conclusion: From a fundamental perspective, the Treasury bond market offers limited upside.
Position: Closed our long position in the long-end of the U.S. Treasury bond market (TLT).
Concurrent with our recent sale of the Treasury curve flattener (FLAT), we’ve decided to also part ways with the long bond by selling our iShares Barclays 20yr-plus Treasury Bond Fund (TLT). Simply put, we think the topping process is underway in both securities, meaning that there is a meaningful amount of asymmetry to the downside from a risk/reward perspective.
From a fundamental perspective, the Treasury bond market offers limited upside – especially given our call for the slope of U.S. economic growth to bottom out in 1Q. Moreover, we think our dovish intermediate-term outlook for inflation is largely priced into the long end of the Treasury yield curve. Recall that in late 2010, long-maturity Treasury yields ripped ahead of the 1Q11 jump in reported inflation. A similar lead time in this cycle supports our view that lower-highs in CPI over the intermediate term is largely priced in at current yield levels.
Using 10yr yields as a proxy, a quantitative breakout above TREND resistance at 2.03% would be incremental confirmation of the intermediate-term growth scenario we have laid out in recent months. That would likely coincide with a breakdown of the TLT ETF through TREND support at $117.07. In the event we receive the aforementioned quantitative signals in the coming weeks, our next step(s) would be to consider a Treasury curve steepener and/or shorting long bonds.
For now, we are content to wait and watch.