Tuesday, October 5, 2010

Goldman Sachs Calls Top in Bond Rally

Looks like our normal Monday morning melt up was pushed out a day.  Not hard to understand considering we just had the end of month mark up, with little time to rest.  Back to your normally scheduled premarket futures rally which should take us near resistance; setting the table for ISM Services at 10 AM.

Interesting commentary out of Goldman Sachs, saying 10 years will peak here in the 2.45-2.50%.  Technically that would coincide with recent lows and form a potential 'double bottom' of sorts on the chart, setting up the potential for a reversal and big rally in yields.  However, this call essentially means QE2 will do little in terms of lowering yields (from here) i.e. QE2 is already priced into the market; well at least the bond market - of course QE2 can be used to goose commodities and stocks forever (and ever).

Definitely a contrary view.

Via WSJ:

  • Goldman Sachs Group Inc., hitherto one of the biggest Treasury-bond bulls on Wall Street, now says the rally has seen its peak and the best trade going forward is to buy stocks, not bonds.  Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs in London, said that the benchmark 10-year note's yield has seen its bottom in the 2.45%-to-2.50% area, breaking ranks with other bulls.
  • The yield has plunged from this year's peak of 4.017% in April as worries about the U.S. economic outlook and euro-zone sovereign-debt problems spurred demand for safe-haven assets.  In recent weeks, the Treasury market got a boost from speculation that the Federal Reserve may step up government-debt purchases to aid the economy.  The yield tumbled to a record low of 2.034% in mid-December 2008.
  • Goldman economists expect the Fed to buy about $1 trillion in assets in coming months. Such measures, known as quantitative easing, aim to push down mortgage rates and encourage banks to lend.  Yet Mr. Garzarelli said some of the quantitative-easing measures have been priced into the market, adding that most of the Fed buying is likely to concentrate on Treasurys maturing between two years and five years, as that is the section closely linked to mortgage refinancing.
  • The monetary stimulus is likely to shore up investors' confidence to buy riskier assets that provide higher returns than Treasurys, Mr. Garzarelli said.  (somewhere Bernanke is saying "yes! yes! yes!")

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