“About US long-term government bonds: the breakeven inflation (spread between the bonds yield and the TIP yield) just broke out, and at the same time the "sentiment indicator" for bonds is declining from overbought levels. Historically this situation has been a good entry point for a short position. In addition the overlay chart with ECRI leading indicator and bond yield (chart library) seems to agree. You have been saying for a long time that this trade could be one that could last for the rest of our lives. Do you think it could be the moment, at least for some weeks? Aren't the USA short of monetary tricks, politically speaking?”

Eoin Treacy's view Thank you these interesting points. Let's take them in order. The spread between the 10-year Treasury and 10-year TIPS collapsed in 2008 as deflationary fears trumped just about all other concerns. As panic receded, the spread quickly rebounded and has been broadly ranging with an upward bias since 2010. The spread paused mostly above 200 basis points from October and broke upwards this week. Some additional upside appears more likely than not. Moves above 250 basis points have generally been associated with inflationary fears.

US Treasury prices became quite overextended relative to the 200-day MA by mid- August and have been ranging with a mild upward bias since. In the process they almost completely reverted to the mean. On short-term stochastics they have moved from overbought to oversold and prices found at least short-term support today. A sustained move below 129 is the minimum requirement to confirm medium-term top formation completion.

If the ECRI Weekly Leading Index Growth Rate, (released weekly with a one week lag) continues to recover it would help support the view that the US economic recovery is on a firm footing. If however growth disappoints, I believe it would be a mistake to question the Fed's resolve in pursuing additional support measures.