Treasuries Risk Shown as Fed Distorts Correlation to Stocks
Comment of the Day

October 29 2013

Commentary by Eoin Treacy

Treasuries Risk Shown as Fed Distorts Correlation to Stocks

This article by Cordell Eddings for Bloomberg may be of interest to subscribers. Here is a section
Treasuries are rising along with stocks as economists say the Fed will keep suppressing borrowing costs to support the world's largest economy after a 16-day government shutdown slowed growth. While government debt was a haven as the U.S.

endured the worst recession in seven decades, primary dealers such as Barclays Plc and Goldman Sachs Group Inc. say the gains this month show the Fed's $85 billion of monthly bond purchases are masking the risk of owning fixed-income securities as the recovery in America takes hold.

“Treasuries are just not worth the risk,” Thomas Higgins, the Boston-based global macro strategist at Standish Mellon Asset Management Co., which oversees $167 billion of fixed- income investments, said in a telephone interview on Oct. 23.

“The economy is certainly not going gangbusters, but the Fed will step away at some point, and that will remove one of the forces of lower yields.”

Reducing Stake
Higgins said Standish Mellon has been reducing its stake in Treasuries this month and plans to keep selling as long as yields on 10-year notes, which fell to a three-month low of 2.46 percent last week, remain below 3 percent.

Eoin Treacy's view At The Chart Seminar, a Type-2 ending is associated with a massive reaction against the prevailing trend which is for the most part unexpected by market participants, shakes people out of their complacency and forces reassessment. The bond markets had just such an event over the summer and investors are now weighing the risk/reward of buying for an additional bounce versus the potential for another sharp reaction when the Fed eventually begins to taper.

The Merrill Lynch 10-year + Treasury Total Return Index continues to extend its rebound and has returned to test the lower side of the overhead trading range. A bearish catalyst such as the announcement of tapering would likely be required to check momentum. However, the potential for a rally to be sustained beyond the short-term appears unlikely considering the medium-term outlook for monetary policy. Therefore anyone who has exposure to sovereign debt and is considering lightening is likely to have a favourable opportunity to do so over the coming months.

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