Real money asks for highest long end yield since November

Real money managers secured highest yield since November at US 10 year auction last night, indicating cautious over longer end of the curve as deflationary fear abates.

• US 10 year bonds were auctioned yesterday at 2.237% compared to 1.925% on April 8^th. This yield is highest since investors asked for 2.365% in November.

Impact -

• Equities might have tougher time given this sudden rise in longer end yields, however Equities are most likely to recover from initial sell offs as they tend to benefit from an inflationary environment. Japanese example indicates that Nikkei kept consolidating during a deflationary environment.

• Dollar would hardly benefit from rising yields as shorter end of the curve remain depressed.

Probable trades -

• Dollar would continue to lag its major counterparts as yields are rising faster outside US, so long dollar may not be the trade for now, even if it still looks like good medium term bet. Dollar index is trading around 93.2, down about 0.45% today so far.
  
  
• Going long on spread between 10 year treasury and 2 year treasury still looks somewhat attractive. As of now spread is trading around 1.7% in favor of 10 year, target is coming around 2.5%.