In tonight’s presentation, DoubleLine’s Jeff Gundlach reiterated his warning to investors that 10Y yields “are likely to break out to the upside.”
He certainly nailed it last time, when he pointed to his ‘favorite’ indicator (Copper/Gold) signaling that bond yields were due to go considerably higher…
But as is evident above, copper underperformance in recent weeks have not helped his case and now, 10Y Yields actually look ‘high’ relative to the inflationary aspects of commodities.
However, there is another reason for doubting the next move in bond yields is a breakout to the upside… actually there are a few trillion reasons…
In late February, Citi that the risk seemed to be that everyone was positioned short of fixed income just as the benchmark for duration (30y US Treasury yields) tested multi-year resistance amidst probably the most bond bearish outlook imaginable.
Consider for a moment what bond investors have seen in the last couple of months…
We have a weak dollar in an environment where the unemployment rate has been below NAIRU for years, inflation is accelerating, fiscal stimulus will boost GDP to nearly 2x trend…
And rates still can’t break out!?
Citi sees something else ahead and disagrees with Gundlach:
We channeled Mo Udall when downplaying the impact of tariffs (steel and aluminum) that impact less than 1.0% of imports and a couple tenths of a percent of GDP.
He taught us that when everyone agrees something else is probably going to happen.
It is time to channel him again as 30y yields look poised to break 3.10% in benchmark yield terms for a test of support near 2.7%
Simply put, everyone and their pet squirrel is record short duration (aggregate Treasury futures complex net speculative positioning shown)…
And as the chart also shows, there is now almost $4 trillion debt on rate-hikes continuing ad nauseum.
So, will it be different this time? Will all these investors on the same side of the boat be right? 30Y Yields have fallen 10bps in two days and are testing the low end of the yield channel of the last month or so…
Will these record shorts start to unwind if we ‘breakout’ lower?
via RSS http://ift.tt/2tP8VN8 Tyler Durden