-Current 10y levels have finally crossed over the trend-line going back to July – strong near-term indicator is broken which suggests 10y support at/above 2.40%.
-Interestingly, the ~2.40% yield level is the .618 Fibonacci level which we have also crossed over – this is a key Fib level which also indicates support at 2.40% with the next at ~2.47% or the .764 Fib level.
-The ECB cannot be discounted either as any meaningful uptick in European rates will likely help push US rates even higher.
Target: US 10y at or above 2.5% by the end of the year.
It recently printed -64bp.
If we assume Trump's target GDP growth of 3% and the FED's 2% inflation target, then a 5% nominal GDP target places the 10y yield at 3%+ (approx around 3.5%).
Perhaps 4 hikes up is the max that the terminal Fed Fund's rate is allowed to go - i.e. a max of 2.25 to 2.50%. There is just not enough inflation to warrant hikes higher than that. If 4 rate hikes do indeed materialize, and the velocity of the back up in the 10y yield continues, I believe the 10s30s curve will go negative -15 to -25bp by the end of this year and will see the 5s30s eventually go flat and negative - that is when equities will likely walk into the door of the correction phase of this last part of the cycle.
Central Banks and asset managers have a lot of concentrated bond risk - central bank's can likely hang longer than most as rates go higher, asset managers are at the whim of their clients/investors. Duration has lengthened significantly so it takes a very small uptick in rates to create losses.
For now increased UST issuance has been focused on the front end - if infrastructure spending materializes and warrants heavy issuance on the long end, then long-end rates should march even higher.
Biggest risk in my opinion to the bond market is a bear steepener. Everyone gets wounded in this scenario and most will get killed. Helmets on, spears in hand.
My update would be that since we broke above the 2.47% Fib line, this will most likely act as a support in the near-term. I still believe looking at the pace of the 5s30s flattening over the last year, in 2018 we will see a flatter curve and possible an inverted curve by 2019.