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

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.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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