Can the Inverted YIeld Curve Continue Its Run? | Summary and Q&A

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March 29, 2019
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Can the Inverted YIeld Curve Continue Its Run?

TL;DR

The Treasury market has experienced a significant drop in yields, leading to an inversion in the yield curve. Speculators have shifted from a heavily short position to a neutral one, and the market may soon reverse and head lower.

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Questions & Answers

Q: Why has there been recent attention on the Treasury market?

The Treasury market has seen an inversion in the yield curve due to the significant drop in yields on the 10-year note, which has garnered attention and raised concerns about the US economy's ability to absorb these lower yields.

Q: What has been the sentiment and policy shift regarding monetary policy?

In late 2018, it was expected that the Federal Reserve would continue raising rates in 2019, but there has been a standstill instead. Sentiment and policy have both dramatically flipped, causing interest in the Treasury market.

Q: What is the current positioning of speculators in the Treasury market?

Speculators were heavily short the Treasury market for most of last year, but they have covered their positions and shifted to a neutral position. This has resulted in a rally in Treasury prices and a considerable fall in yields.

Q: What is the potential future direction of the Treasury market?

The market may reverse and head lower, with traders buying or selling based on opinion and fundamentals. The authors suggest that interest rates may be at a trough and Treasury futures at a peak, potentially leading to a fall in prices.

Summary & Key Takeaways

  • Yields on the 10-year Treasury note have fallen almost one percentage point since November 2018, leading to an inversion in the yield curve.

  • Speculators were heavily short the market, expecting yields to rise, but as sentiment and policy flipped, they have covered their positions and Treasury prices have rallied.

  • Going forward, traders may base their buying and selling decisions on opinion and fundamentals instead of unwinding positions, potentially leading to a reversal in the market and lower prices.

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