The US 10yr bond yield and US GDP growth is always a fascinating relationship, and more times then not the 10yr is right on US growth. In the below chart from Hedgeye (the best research firm in the business when it comes to GDP tracking), they show in the black bars the actual US real GDP Year over Year growth %. The chart also show’s Hedgeye’s forecast along with the Bloomberg consensus forecast, the Atlanta Fed, and NY Fed’s forecast. We also can see that the cycle went from the highs of 1Q2015 at 3.3% YoY growth to a cycle low 2Q2016 where GDP YoY growth bottomed at 1.3%.
Whats interesting is when we look at the chart of the 10 year yield below, we see the market bottomed at 1.32%(intraday low) pretty much in line with GDP in June/July the 2nd quarter of 2016. So the bond market correctly priced in real GDP growth on a YoY basis.
Now today and with the most recent pullback testing the 2.16% area coming off the highs of 2.64%, I think this 2.16% area is key. Its an obvious technical level as well as the 200 day and this represents an important area. We like starting a core short again on the 10yr and there is patience warranted to slowly build into this longterm core short. If we look at the move off the intraday low of 1.32%, a 50% retrace of the move from 1.32% lows to the 2.64% highs, this gives you about half way up of the bullish wall concept we use, a 50% retrace of this area I think is a highly probable location for a LONG-TERM Higher Low, as it comes in around the 2.00% area. What is interesting again is that GDP is currently tracking at 2.00% – so it makes sense for a move to this location.
From there if we take Hedgeye’s GDP forecast, a bounce back to 2.50% into the end of the year and possibly even a larger move to 3% in 2018 is possible. Even considering the Fed’s forecast, which historically is awful, is for 2.60% GDP growth.
Part of the move down in yields has been the fact that Inflation has been rolling off the top, cycling lower since the first quarter. This inflation coming off (and this can be seen in any of the Commodity Basket tracking ETF) but inflation rolling over is part of why rates have leaked lower.
In summary from here I think we want to start thinking about shorting US Treasuries for the LONG-TERM but we do need to be patient as I said earlier. We can still see a further slide to 2.00% in the INTERMEDIATE-TERM but this 2.16% level we like selling for a trade. If it breaks we may take some risk off but we will be looking to get more aggressively core short if and when we see the 2.00% zone.