Yields Soar as Mortgage Bond Holders Start to Sell

The yields on treasury bonds spiked up yesterday, in spite of a fairly good treasury auction. According to experts, holders of mortgage bonds are selling them and buyers on the other side are hedging by selling treasuries of appropriate duration.

As I have alluded to, mortgage spreads are at near historic lows and unlikely to tighten further. As a result any further rise in treasury yields will lead to higher mortgage rates. Higher mortgage rates reduce the value of existing mortgage bond holders who are now selling.

Equity markets reacted with a sharp sell-off. The action in the bond markets is likely to be a wake-up call to equity markets, especially the bulls. Though the market has been ignoring bad news for some time, higher yields will certainly derail any resurgence in economic growth and threaten the green shoots.

Disclosure: Long TBT Bearish Put Spread.

Comments

[VennData:]

They're dumping bonds because the risk-aversion trade is over.

May 28 07:15 AM

[Clive Corcoran:]

Maybe they were dumping bonds yesterday following some rather downbeat comments from Pimco's "strategists" over the last few days. It's certainly one way to get Chairman Bernanke's attention.

May 28 07:21 AM

[johnmorrison9:]

In the White House they have confidence that they can continue to scare the public to buy this trash, maybe a new flu or some Korean crap. It will be special.

May 28 11:01 AM

[RiskReturnO...:]

Please elaborate your Long TBT Bearish Put Spread position.

This one is very interesting to me, since TBT is already double inverse price of 20 year treasury.

Put spread is buying one put and selling another put.

What strike prices are you using?

What exactly is the derivative trade (e.g., put spread on a double inverse index) ....... is there is simpler bet on direction of treasury yield?

May 28 12:08 PM

[User 386855:]

I have a GNMA bond fund. Does this mean I should exchange it for something else?

May 28 10:33 PM

[Vikram Saxena:]

I was betting that TBT will go down. However to keep my risk limited I used options, since it limits my max loss. I used a put spread to reduce the theta (time decay) while capturing most of the delta (price based movement). Regarding strikes, I opened the long leg, at or near the money, and the short leg at or near my downside price target.


On May 28 12:08 PM RiskReturnOptimizer wrote:

> Please elaborate your Long TBT Bearish Put Spread position.
>
> This one is very interesting to me, since TBT is already double inverse
> price of 20 year treasury.
>
> Put spread is buying one put and selling another put.
>
> What strike prices are you using?
>
> What exactly is the derivative trade (e.g., put spread on a double
> inverse index) ....... is there is simpler bet on direction of treasury
> yield?

Jun 12 01:13 PM