I was listening to Bill Gross on Friday and he mentioned that we will be hitting the 30 year downtrend line in ten year Treasuries between 2.4 and 2.45% (currently 2.37%). Gundlach made fun of Gross’s line-drawing skills last year. My line drawing skills are just as bad. I have no idea what people look at – cash, futures, constant maturity, daily/weekly/monthly, high/close, etc. It’s like asking the proper way to stick the pins on a voodoo doll, when you don’t believe in voodoo. I look at it occasionally only because others in the market look at it. If the “Bond King” doesn’t know how to draw a line, how can anyone else be expected to do it correctly?
All other things being equal, we will have some very solid resistance in yields coming up. When a trend has lasted for over THIRTY YEARS, it’s going to take a decent catalyst to get us to break. We may need a lot more than a weather-affected Employment Report. We are also right at that 100 day moving average that the voodoo practitioners like to look at.
It’s not a question of “if” the trend line will break but “when”. This isn’t a bold statement. In another decade, the trend line will hit 0%. So unless you think there are hordes of people wanting to lend the US government money at 0% with a $40 trillion debt burden, most of the Baby Boomers retired, and the Social Security trust fund about to run out of money, we will have a massive fixed income pukage before then. The question is “when?”
If we think about what could cause the pukage this year, the leading candidates would be: (1) a stronger-than-expected ECB taper, (2) stronger-than-expected US growth, and/or (3) stronger-than-expected global growth. The latter two things seem more likely to happen. In the US, any tax cut plus hurricane rebuilding plus some wage gains could be spur a demand surge. Maybe.
One thing is certain… either the downtrend line will hold, or it won’t. Call me Captain Obvious. The next logical step however is to think about what the curve could look like in both of those scenarios… [See Trade Thoughts: Simple Yield Curve Scenarios]