Over the past 24 months the Fed’s Q’Ever injections have battled rational expectations for the hearts and minds of would-be investors.
As capital was gradually enticed out of safe havens toward riskier markets, 5 year treasuries were sold off and their yields rose through most of 2013. For about a year, the long end 30 year notes went along for the ride, also selling off into late 2013.
But then something happened on the way to growth nirvana. The real economy turned down and 30 year bonds broke faith with QE-hype: long bond prices began to rally as 5 year prices flat-lined over the last 12 months. The result has been an epic 143% increase in the 5 yr over 30 yr yield ratio. Using history as a guide, if credit expansion and demand has in fact topped out this cycle, then the 30 year bond should continue to rally (and its yield will fall) and the 5 year yield will also give up its naive QE faith and follow its longer more sober brother lower as it did from the cycle top in both 2000 and 2007.