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  • 10 Year US Treasury Bonds (Side Note On Pimco Closed End Funds) 0 comments
    Aug 13, 2014 6:45 AM | about stocks: PCI, PDI

    US Treasury Complex

    We think prices are generally out of line with reality. Markets are paying more attention to geopolitical happenings (Iraq, Russia/Ukraine, Israel), than they are to real fundamentals. Economic data in the US has generally surprising to the upside.

    US Economic Surprise Trend (from TheRadarTrader.com);

    As long as economic data in the US, continue to surprise (relative to the consensus), we think risk is on the downside across the US rate curve.

    Consensus is more optimistic on US Treasury Bonds than they have been since summer 2012 (from SentimenTrader.com);

    (click to enlarge)

    We think the two graphs above illustrate that the market has a very bullish opinion at the wrong time, and that any easing in geopolitical tensions or strong focus shift away from geopolitical tensions and toward positive economic data, exposes large downside risk across the Treasury Complex.

    We find the idea of locking in rates down here, an attractive proposition. We have not yet committed to the short, because we are generally still seeing buying pressure on up days and below avg selling pressure on down days. Today there is a 10YR auction for $24Bn.

    Bond Auction Schedule from TreasuryDirect.gov ;

    We want to see how the auction goes & how September 10YR reacts to the 125.18 level.

    10YR showed no interest above 126.00 August 8 & has been weak heading into this auction, since then. A sustained break below 125.18 in 10YR after both the 10YR auction today & 30YR auction tomorrow, would be a sign of weakness & likely opens the door for some downside. If 125.180 holds, then we'll keep our powder dry for now.

    September 10YR Chart Analysis;

    (click to enlarge)

    Side note;

    Pimco Dynamic Credit Income Fund (NYSE:PCI) & Pimco Dynamic Credit Income Fund (NYSE:PDI), both closed end funds trade at substantial discounts to NAV and pay nice yields.;

    PCI;

    7.46% discount to NAV, with 7.8% yield (monthly distribution)

    http://us.allianzgi.com/Products/pages/653.aspx?ShareClassCode=ARTIFICIAL

    PDI;

    3.7% discount to NAV, with 7.1% yield (monthly distribution)

    http://us.allianzgi.com/Products/pages/631.aspx?ShareClassCode=ARTIFICIAL

    Prices of these Closed End Funds trade look cheap compared to Treasury Bonds. See chart below from Yahoo Finance;

    http://finance.yahoo.com/echarts?s=pci

    Red Line - IEF (I-shares 7-10YR ETF)

    Green Line - PDI

    Blue Line - PCI

    (click to enlarge)

    We find PCI & PDI attractive here relative to 10YR, we like owing PCI & PDI vs our bearish stance in 10YR.

    Regards,

    David Flynn

    Disclosure: The author is long PCI, PDI.

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