From separate conversations and dialogues, many of you will know that I’ve harboured a view that the long end of the US Bond market is currently priced at precipitous levels and consequently that yields are not good value at all at the moment. It would naturally have been preferable had I got round to writing this update before yesterday’s FOMC statement and their begrudging ackowledgement of an improving US economy, which has since sent US Long Bond yields upwards. However, in the grand scheme, yesterda’s price action doesn’t devalue our opinion, which is that holding such instruments is only worth doing for policy error and war risk insurance cover of sorts, but they should not really be viewed as a capital gains/growth generating vehicle. Our view is that the US Long Bond Yield is prone to expand from it’s current level of c.3.4% to at least 4.4%, where it may find resistance in the form of long range averages and median rates. Our own view is that yields could approach 5% within 3 years. This slightly longer timeframe is in place to account for the current interventions to cease, whether they be QE, Twist as well as the Fed’s tacit undertaking to hold Fed Funds rates at 0.25% up to and including most of 2014. We think a large amount of the yield expansion will take place whilst these programmes are still running but mention a longer timeframe as a prudence measure.

Institutional clients that agree with this view could utilise bilateral total return swaps to express their trading view, and clients without prime brokers can use ETFs, Futures or Options to trade this view. Timing aside, we estimate that this trade, should our forecast materialise, could generate an unleveraged cash-to-cash return of 25% in a three year timeframe, and a multiple of that if leverage or derivatives are used. We fully expect there to be many bumps in the road and we expect that the cosmic events in play currently will lead to a material degree of volatility.