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IEI: 0% Is The Next Destination For 3-10 Year Treasury Yields


  • 10-year Treasury yields plunged under 1% as yield curve remains inverted despite Fed's emergency rate cut.
  • Treasury yields will likely follow German bunds' footsteps 5 years ago and drop towards zero.
  • Collapse in crude oil prices piles further pressure on bond yields due to higher risks of deflation.
  • We expect steep declines in 3-7 year Treasury yields on a bull steepening yield curve, leading to further price gains in the corresponding ETF (IEI).

The verdict is in just days after Fed's 50bp emergency rate cut : It is not enough. Despite non-farm payroll number blowing out expectations, it was overshadowed by a spiraling coronavirus contagion which led to 10-year Treasury yields plunging below the key 1% level on Friday, while the yield curve remains inverted based on the 10yr-1mo differential:

Source: U.S. Department of Treasury, WingCapital Investments

As discussed in the previous article on why 7-10 yr Treasury ETF (IEF) will likely outperform on a risk-adjusted basis, it is widely expected that the Fed has embarked on a new rate cut cycle, which will lead to the bull steepening of the yield curve like between 2007-2008:

Source: U.S. Department of Treasury, WingCapital Investments

During that period, the 3-7yr Treasury ETF (NASDAQ:IEI) likewise proved to be a strong performer just behind IEF and long-end ETF (TLT) with a double-digit total return:

Source: WingCapital Investments

U.S. Is Now Following Germany's Footsteps

The decisive break under 1% in 10-year Treasury yield is highly significant, if we consider what followed after German bunds similarly pierced through 1% more than 5 years ago. To be specific, after breaking through the crucial support, German 10-year yields continued to fall off the cliff to just above zero before finally rebounding in early 2015:

Source: U.S. Department of Treasury, WingCapital Investments

Thereafter, any bounces were capped under 1% in German yields, as a new trading range between 0-1% was in effect until zero ultimately gave way as well. While we are not ready to forecast negative rates in the U.S. just yet, 0% is most likely the next stop for short and intermediate-end Treasury yields in light of a worsening Covid-19 outbreak domestically as well as a crumbling oil market.

OPEC Debacle: Adding Fuel To Fire

Meanwhile, a perfect storm

This article was written by

Quantitative Strategies utilizing Empirical Analysis, Pattern Recognition and Statistical Arbitrage techniques. Identifies high-probability long/short opportunities with short-medium term horizon in large caps, ETFs, commodities and FX. Macro Commentary and Market Research.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

We may have options, futures or other derivative positions in the above tickers mentioned.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (1)

Excellent data and commentary,thanks.
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