In his daily note, David Rosenberg — who’s been bullish on bonds, and thus on the wrong side of the recent move — analyses yesterday’s huge selloff:
The 10-year Treasury yield is now approaching its most overbought level (according to its relative strength index) since the summer 2007 yield peak. Other similar overbought periods were at the August 2003 and May 2004 interim yield peaks. Yields declined dramatically from each of these overbought yield peaks and stocks took a break. Bond market sentiment is tied for record lows as well (consensus at 25% bulls) and today’s yield exceeded the 61.8% retracement level from the April yield peak around 4.01%, confirming that the October low of 2.4% was ‘the’ low for some time yet.
I’m kind of thinking that the secular bull market in bonds will be a basing period of rolling lows near the 2% level on the 10-year Treasury note yield. The December 2008 low was THE low; the recent October 2009 yield low was another important low, but at a higher level. So this does not rule out a nice rally in bonds once capitulation sets in. The stock market will be the arbiter as it was when the 10-year note yield hit 4% last April and the equity market turned in its interim high, which wasn’t pierced until a month later.
Recall that last year this time bond yields went up over 60bps trough to peak and the S&P 500 rallied 2% and closed at the highs for the year as 2009 drew to a close. This told us nothing about how 2010 would shape up, which was a year of volatility — a high in April followed by European-induced concerns in May and June, then double-dip concerns in July and August, to then be followed by euphoria amidst QE2, the mid-term elections, more fiscal stimulus and hedge- fund performance catch up. 2010 turned into a volatile meat-grinder and the year was saved for investors because of the extension of monetary and fiscal stimulus — there is a whole new Congress and a whole new set of voters on the Fed in 2011, so relying on more stimulus could be dangerous. In the interim, there are plenty of things to be worried about from European fiscal woes, to the upcoming U.S. debt ceiling file, to another leg down in housing prices, and to heightened inflation pressure in the emerging markets.
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