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After watching some markets develop over the past week, we thought it warranted a few thoughts on a possible outlier outcome in Treasuries over the next several weeks.
While the backdrop for long-term Treasuries has largely remained a benevolent place for investors this year, the markets have again traded in a descending range from their February highs, which in the past has presaged a subsequent trend shift lower. Taken in context with the broad range that long-term Treasuries have remained in since their momentum highs back in January 2015, a potential break below support extending from their late December 2013 lows – could accelerate downside pressures and markedly extend our outlook for a rising yield environment beyond Q2.
One historical period that we have been following for possible insights is the market environment headed into the spring of 1987, where investors had pushed long-term Treasuries significantly higher over the previous two years on the back of a sluggish global economy and a collapse in oil prices. It wasn’t until the global economy stabilized and oil prices began moving higher that the Fed began to raise rates in April 1987. This shift, following several years of disinflationary market conditions that had greatly buttressed the trend in Treasuries – came to an abrupt end that spring. Headed into October, the price on the 30-year Treasury bond had fallen by over 20 percent.