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4/8/2014

US 10 Yr Note & US 30 Yr Bond – Bullish Sentiment and Economic Data Surprises

The US 10 Yr Note’s Daily Sentiment Index (DSI) crossed above 50% bulls last Friday (April 4th, 2014) for the first time in 227 days. Oddly enough, its previously longest streak of bearish sentiment ended at 226 days on August 15th, 2006.

         
Copyright 2014 Arbor Research & Trading, Inc. All rights reserved. This material is for your private information, and we are not soliciting any action based upon it. This material should not be redistributed or replicated in any form without the prior consent of Arbor. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.

 

  Last week we highlighted how the US 30 Yr Bond’s rapid ascent (70+ pts from its 75-day minimum) from extreme bearish to bullish sentiment has typically seen follow-through to even lower yields. Since 2005 four other instances (9/13/06, 8/30/07, 6/1/11, and 5/14/12) all saw lower yields 50 days later by an average of -37 bps. Yields are little changed since this event was triggered (3/27/14).    

             
Copyright 2014 Arbor Research & Trading, Inc. All rights reserved. This material is for your private information, and we are not soliciting any action based upon it. This material should not be redistributed or replicated in any form without the prior consent of Arbor. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.

 

Economic data surprises in the US as measured by Citigroup’s Economic Surprise Index (CESIUSD) have been mostly negative since mid-January. Note this index and 50-day changes in US 10 Yr Note yields have a moderately positive correlation. Additionally, the CESIUSD exhibits high autocorrelation, therefore discernable shifts are often lasting.

Below is a possible future sequence of events: 1) Continued negative economic data surprises send the index below -40. In this event, we would expect longer maturity yields to remain sideways to lower over the near-term, reflecting their now bullish sentiment. 2) Economic data misses soon run their course after reaching a bearish extreme, triggering a shift higher in the CESIUSD. 3) CESIUSD crosses back above -40, which, historically, has been followed by higher yields 82% of the time 50 days later. Average of those rising in yield is +33.5 bps.

Copyright 2014 Arbor Research & Trading, Inc. All rights reserved. This material is for your private information, and we are not soliciting any action based upon it. This material should not be redistributed or replicated in any form without the prior consent of Arbor. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.