It’s Not Just About Europe and the Long Bond

It’s Not Just About Europe and the Long Bond

We focus predominantly on the long end of the curve here because that’s where I see the biggest money-making opportunity given the ETFs we have access to.  But, watching the entire yield curve is important in gauging the overall trend of bonds.

To that end, I want to point out that the yield on the 2– year Treasury, which is most sensitive to Fed Funds rate expectations, rose 5 basis points to 0.59% (5 basis points is nearly 10% and the yield on the 2-year is at a multi-year high).  This is important because while Europe is a major influence on the long bond, there appears to be something else going on here (European buyers wouldn’t buy the 2-year in a “reach for yield”).

As I’ve said, the short end of the curve is much more sensitive to Fed Funds expectations. So, the fact that the 2-year bond has declined/yields risen to multi-year levels is significant. It implies the bond market is preparing for a more “hawkish” Fed – at least compared to what we’re seeing in the equity market.  Simply, the 2-year yield wouldn’t be at multi-year highs if the market wasn’t starting to price in the possibility of sooner than expected Fed Funds “lift off” (the date rates start to rise), or a faster than expected rise in rates. That, on the margin, further validates my idea the trend in bonds is now lower, and that’s positive for our various “higher rate” positions.