• Several weeks after recommending a core long in 10-year and 30-year
Treasuries in front of 2.40% and 3.25% respectively, I endorsed
adding to those positions in my July 17
th
note “Bonds are Back”. Today, I would again add to those positions. I
believe 10’s will take out 2.00% by the end of September and test the
year’s low when it breaks below 1.75% before the end of the year
(10’s/30’s curve will flatten further). Long Treasury yields are driven
by expectations of global growth and inflation which I expect will both
stay on a downward trajectory for the remainder of the year regardless
of what the Fed does. (I also expect USD strength, commodity weakness,
widening credit spreads, and an equity sell-off.)
The Fed is in a Bind
• The intention of Fed policy over the past 30 years has been to
self-correct business cycles into a ‘steadier state’ by easing interest
rates into weakness and hiking them into strength. Unfortunately, there
is
political-asymmetry between easing and hiking which has resulted in the stair-stepping of official interest rates down to the zero lower bound.
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