Thursday, October 26, 2017

About the "Treasury Market is Predicting Doom" Argument...


The top chart is the IEIs, which represent the 3-7 section of the treasury curve.  The middle chart is the IEFs, which are the 7-10 year section of the curve, while the bottom chart is the TLTs, which represent the 20+ year section of the curve.  All three fell through technical support yesterday; all are below their respective 200-day EMAs.  

There are two reasons for this.  First, the market believes Trump will nominate a more hawkish Fed governor, probably John Taylor.  Second, the market is betting the Republicans will pass a large tax cut.  Traders believe this will lead to higher growth and more inflation.  Therefore, they are selling bonds, which under-perform in a higher growth, higher inflation environment. 

If this trend continues, we'll see the treasury curve widen.  That sends the "yield curve is at its lowest level in years, we're doomed" argument out the window.