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Bond Sell-Off: Two Brokerages Face Off

Friday, 31 May 2013 | 11:25 AM ET
Glow Images | Getty Images

We love face-offs at CNBC. And it looks like we have one today…over bonds.

Two major brokerages are taking opposite sides over whether or not a long awaited sell off in the bond market is here.

"The bond sell-off: It's for real," Goldman Sach's fixed income analysts said in a research note released on Friday, pointing to a recent uptick in Treasury yields.

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"In our opinion, the market has overreacted," countered UBS in a note from its analysts.

Central to both opinions is the guessing game surrounding the Federal Reserve's bond buying through its so-called quantitative easing program (QE3). As the economy improves and the need for the program wanes, the Fed is expected to "taper" off the bond buying. When that happens, or when the market collectively thinks it is about to happen, bond prices are expected to generally sink as a major buyer leaves the market.

Recent comments from Fed officials, and testimony from Fed Chairman Ben Bernanke in particular, led to slight drop in Treasury bond prices and a rise in their corresponding yields recently.


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Those jitters, plus some growth concerns and developments in Japan, lay behind Goldman Sach's bond sell off declaration on Friday.

"Our end-2013 forecast for 10-year U.S. Treasurys remains 2.5 percent, above the forwards, and we will be looking for other opportunities to trade the market from the short side," Goldman declared. (Read more about Goldman's opinion here)

But UBS countered that "the market seems to be overreacting to the slim possibility that the Fed could begin tapering fairly soon."

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"A slow steady increase in rates would mean that the world continues to heal, the economy continues to improve," said Robert Doll of Nuveen Asset Management, revealing his take on market uncertainty and how to play it.

"We were surprised by the Treasury sell-off last week in response to the various Fed speakers. Chairman Bernanke's testimony to the Joint Economic Committee seems particularly even handed," the UBS analysts declared in the note. "…Sure, the Fed could taper in the next couple of months, but it still seems very unlikely."

Indeed, UBS argued that the 10-year Treasury note, currently trading at a yield of around 2.17 percent, is roughly 50 basis points over-valued.

To use an old cliché and state the obvious, only time will tell who's right. And while it's entertaining to watch the face off, it's important to remember the debate is critical to bond market investors. If you own bonds right now, mistiming when they might decline in value could cost you a lot of money.


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