What was interesting about the Fed’s QE3 announcement was the fact that they decided to purchase mortgage-agency debt rather than adding to their existing Treasury debt holdings. This put downward pressure upon agency debt yields of course, but then it also provided for a rise in both the 10-year note yield as well as the 30-year bond. Our interest lies in rally in the 30-year bond yield, and which we covered in the current edition of our magazine (click here, page 58 – http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v8_generic) in suggesting a long term trade simply sitting on the short side in US & UK long bond contracts. A look at the chart below continues to shore up our conviction in this trade.
If we look at the monthly chart of the 30-year bond we can see that the previous support at 2.50% has held; we find the distance below the 115-month moving average tested its -40% oversold level and bounced – and we are starting to see the 14-month stochastic turn higher. This all argues for higher bond yields. But what we find more than a passing interest, is that since QE policy moves have come into being since 2008 – each and every announcement always led to higher yields and a test of the 115-month moving average. If that is the case now, then we’ll see the 30-year bond move from 3.08% upwards of 4.37% in the months ahead.
Anyone who has a variable rate mortgage and finds themselves unable to move mortgages due to the crazy credit constraints currently in place in the UK could in fact look to short Long gilts pro rata to your mortgage size. To me, this facility provides for an interesting way to mitigate this – and tax free.