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The Treasury rally is continuing as the yields on both the 10 and 30 year benchmarks fell to unprecedented levels.  Treasuries have posted their best six month return since 1995 according to Bloomberg.   Bloomberg also writes there is a growing pool of sovereign debt with negative yields, increasing by $1 trillion in just a week to about $11 trillion.

Some are postulating the UST is next given massive and still increasing global liquidity, the result of unprecedented central bank policy.

Most, including me, have been wrong for years about rising rates.  Today Wall Street economists are forecasting the 10-year to yield 2.65% by year end.  If rates were to rise by 130 basis points by year end, the annual six month return for the 10-year would be -22.68%.  Breakeven on a total return basis would not occur until January 2022.

Less than one year ago the 10-year was yielding about 2.55%.

Who is right?  Investors or economists?  Many times I have commented about the outsized influence HFTs are having upon the markets.  Over 95% of Treasury trading is conducted electronically utilizing some type of algorithm thus suggesting there is little fundamental analysis.

Perhaps the only concrete statement is when selling commences in the sovereign debt and Treasury markets, fortunes will be made and lost.  It is not a question as too if but rather as too when.

Reiterating prior remarks I think the Treasury/sovereign debt market is considerably more overvalued than the NASDAQ was in 2000, the last major mania and decimation of a major market index.

What will happen today?  Will the ISM non-manufacturing index or the Minutes from the June FOMC meeting alter Treasury market psychology?

Last night the foreign markets were down.  London was down 1.53%, Paris down 1.93% and Frankfurt down 1.92%.  China was up 0.44%,  Japan down 1.85%and Hang Sang down 1.23%.

The Dow should open moderately lower as the markets fret over prospects for global growth in the wake of Brexit.  Can I also suggest there is some profit taking following the greatest weekly rise since November?  The 10-year is up 14/32 to yield 1.33%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.