Justin Moy

Treasury Yields to Rise Further

Dan, you have some very interesting analysis. I believe the market is fixated on growth much more than inflation; the reason 10-year yields went to 4.40% in late 2006 was due to speculation on a severe growth slowdown. Because those doom and gloom predictions have not come to fruition, those bets are being unwound. Back on December 5th, you wrote an article and stated:

"Much like the fast money folk, I jumped in on the long side of the March 10 year once the 4.47% level was taken out. With support from the bond chart, which argues for the bond to trade to 4.50%, some people I talk with are looking now for 4.25% in 10 year yields. I am looking for more of the 4.30% area on 10s as the yield has entered another trading range from the fall of last year. The 4.30% level would be the previous low from that time period before we began the move to 5.25% earlier this year."

In response to your writeup, I said:

"Interesting analysis Dan, but I respectfully disagree with your outlook on the 10 year yields. You argue that treasuries are overvalued, yet you are long the market and looking for 4.30% on the ten year. Much of the recent speculation of Fed cuts for Q1'07 was based on the housing market slowdown spreading to the rest of the economy. That has not proven to be the case--as you agree in your writeup. I felt comfortable shorting the 10-year note future this week. After today's job report, even the most bullish of bond traders must admit that the rest of the economy outside manufacturing/housing/... is pretty solid."

Back then, during the first week of December, I shorted the 10-year note futures, and have held on to that position, riding it all the way from the 109 handle to the 106+ handle. But I have recently just exited that position and have gone long, and will add more as the yields approach 4.85%, the high in yields from August 06. The market has nearly squeezed out any interest rate cut for the next few Fed meetings through April, and many are looking for an acceleration of growth as we progress through 2007. The 10 year yield has backed up nearly 40+ basis points in a little less than two months, and oversold indicators are about to flash. The yield will correct and buyers will come into the treasury market shortly to pick up some good bargains.

It looks like we'll be on the opposite side of the trade yet again. We'll see who's right.

Best of luck--

Justin