options trader

U.S. Treasury securities have been tumbling, sending interest rates higher.

Trading volume has been massive, and top analysts like Goldman Sachs are convinced the sell-off is for real.

However, UBS is coming up on the other side of this trade in a brief note titled “Buy Treasuries.”

“In our opinion, Treasury yields have risen too far, too quickly,” said Mike Schumacher.

He provides three points, which we present verbatim:

  • The market seems to be overreacting to the slim possibility that the Fed could begin tapering fairly soon;
  • Our model indicates that the 10yr Treasury yield is about 50bp above fair value; and
  • Positive seasonals. Treasuries and Bunds typically perform well in June-September.

“We typically avoid big duration calls, because we believe they typically offer poor risk/return trade-offs,” he added.  “However, we are making an exception.”

“The yield has not been this far out of line since August 2012,” he wrote regarding his model. “Briefly, the model contains two predictor variables. One is a function of economic surprises, and the other is linked to eurozone peripheral spreads. Confidence intervals are critical, and our range for this model is +/- 40bp.”

Here’s Schumacher’s chart:

ubs buy treasuries

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