The counter-trend rally in U.S. Treasury's that we had anticipated has largely played out and it is time to position for an eventual resumption of the cyclical bear market. We recommend moving bond portfolio duration to a fully below benchmark stance.
When 10-year Treasury yields reached 3% in mid-September, our bond strategists argued that the selloff had gotten stretched and that market expectations of the fed funds lift-off date were overly aggressive.
Expectations have since reset and yields have dropped nearly 40 basis points, providing what appears to be a good selling opportunity against the backdrop of improving leading and coincident economic indicators. The Washington circus clearly complicates timing but we think most investors would be best served by not trying to catch the exact bottom in rates. Bonds may well rally on the ebb and flow of news from Washington but the rally is likely to be fleeting and difficult to play.
[Hear More: Brian Pretti: When Interest Rates Rise - Houston, We Have a Problem!]
Our base case remains that a deal will soon be reached and concerns of a growth setback will fade. Moreover, the Fed will lose one of the key reasons it chose to delay tapering.
Bottom Line: Our U.S. Bond Strategy service recommends trimming portfolio duration to fully below benchmark. (tweet this!)
