The argument here has been that with low US economic growth, nominal inflation and near zero
short term yields, it was reasonable to see the long 30 yr. Treasury trade in a range of 3.00 - 3.50%.
The central idea has been that one needs at least 300 basis points of premium in the short run to
offer partial compensation for all that can happen to the bond market over the long term. $TYX
Well, as the chart shows, with the considerable volatility in the market, the T-bond has not spent
all that much time in the range in recent years. New financial regulation has reduced liquidity
available for market makers but even more critically, the long term downtrend in yields has
birthed a generation of market speculators who use Treasuries to hedge portfolio risk more
aggressively than in the past.
Concerns about the prospects for global economic growth and a stronger US dollar have penalized
the equity markets for months and Treasuries have been granted safe haven status as players fret
that central bankers fail to achieve an acceleration of global growth even with the provision of
ample liquidity and now negative short rates in a growing number of cases.
Because I have yet to abandon the idea that the US economy will have better economic
performance this year, I have been very leery of the bond market given the substantial risk to
the market inherent in faster than generally anticipated economic growth. I currently have no
interest in long side trades in Treasuries until 3.50% or higher, and even then, it might be a
tough go if the Fed, currently chastened by a sloppy global economic environment, reverses
course course on raising short term rates if economic growth improves in the US and inflation
momentum firms up.
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