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Bonds are way oversold at this point, market watcher says. Here’s what that means

Bonds are way oversold at this point, market watcher says.

Bond yields hit the accelerator again this week with the 10-year Treasury hitting its highest levels since mid-2011.

Bond prices, which move inversely to yields, are now looking oversold, said Larry McDonald, editor of the Bear Traps Report. He told CNBC's "Trading Nation" on Thursday what this could mean for bond markets.

  • The U.S. 10-year yield is much higher than in Japan and Germany, but a global shortage of dollars has increased the cost of hedging these bonds.
  • Even though U.S. yields are relatively high, they're less competitive to Treasurys overseas because of those global hedging costs.
  • This is putting dramatic selling pressure on the 10-year and starting to upset the market.
  • The U.S. 10-year Treasury yield should hit 4 percent this year.
  • The spot between a 3.1 percent and 3.15 percent yield offers a good buying opportunity on the TLT long bond ETF.

    Bottom line: Non-U.S. bonds look more competitive and will continue to pressure U.S. 10-year bonds.

    Correction: This story was revised because the strategist says he meant to recommend the TLT long bond ETF as a good buying opportunity.