Gavekal Capital: Deja Vu All Over Again for the Long Bond?

Tuesday, May 5, 2015

Deja Vu All Over Again for the Long Bond?

The 30-year treasury bond has experienced a rather large selloff by historical standards over the last three months. Yields have risen from roughly 2.2% to almost 2.9% in just over three months - a nearly 25% increase in yield - putting it on par with the most significant selloffs we've experienced since 1981.

The important question for investors at this point is whether this is a genuine trend change or a dip that should be bought. Recent history suggests the latter.

In the fist chart below we show the three month percent change in yield for the 30-year treasury bond and lines depicting 3-standard deviations from the mean 3-month change. We can see a number of 3-standard deviation events over the last several years and the recent selloff is near that level.

The second chart below shows the 30-year bond yield over the last five years with reference lines marking every 3-standard deviation selloff. The takeaway is simple. After such a large move in the long bond, the selloff was usually exhausted and yields were at or near a peak. On every occasion yields were lower within a few months time.