After being dead wrong for years, bond bears are feeling more confident going into the weekend.
The Treasury market sold off big this week, taking the benchmark 10-year yield up 26 basis points to 2.29%, a four-month high.
Yields had already been inching higher, but shot up Tuesday after the Federal Reserve’s Federal Open Market Committee made slightly more positive comments about the economic outlook.
Although the FOMC reiterated its view that economic conditions were likely to warrant an “exceptionally low” federal funds rate at least through late 2014, market participants didn’t buy it.
The FOMC’s wording and a series of improving economic reports appears to have flushed out already nervous holders of long-term Treasuries, some of whom may have been anticipating a third round of quantitative easing.
“If the economy continues to evolve as it has in recent months, it is hard to see how the Committee as a whole will be able to justify retaining this view for long,” said Alan Levenson, chief economist at
T. Rowe Price in a research note today.
The market’s reaction “marks a notable turn in the interest rate outlook,” said Jeffrey Rosenberg, BlackRock’s Chief Investment Strategist for Fixed Income, in an update Friday.
Futures markets were already anticipating that the first rate hike would come in January 2014, Mr. Levenson said.
“Bearish speculators are finally profitable. The [short Treasury] trade has not been profitable for two years now,” said Paul Weisbruch, vice president at Street One Financial LLC, a trading firm for institutional investors.
It looks like interest rates “are starting to move meaningfully higher,” he said in an interview.
However, the selling may be overdone in the short term.
Long-term Treasury ETFs, like the ishares
Barclays 20+ Year Treasury Bond Fund (TLT), have corrected down to their 200-day moving averages.
“There’s probably some support there [where some] people are adding, betting on a bounce,” Mr. Weisbruch said.
And current levels “are an appealing entry point for those underallocated” to Treasuries and high-quality corporates, he said.
