Chart of the Day

Technically, the 10-year Treasury yield could back up further – even above 4 percent – and still be in line with the long-term downtrend in interest rates. The November rate backup was merely a correction in the accelerated decline in Treasuries that began in April. Notwithstanding, rates today remain approximately 120 basis points below where they were just seven months ago, and even prior to the European crisis this would signal that the downward trend remained definitively intact.

Long term, I still believe that we will ultimately return to 2 percent on 10-year notes. But as any investor knows, markets don’t move in straight lines. In my opinion, a rise in rates to 3 percent or higher would be a buying opportunity because any backup in yields above this point would have a deleterious effect on the economic recovery, especially given the fact that the mess in housing is no better today than it was one month ago when rates were below 2.5 percent.

–  Scott Minerd, Guggenheim Partners CIO

Needless to say, with the long bond yielding north of four percent and core inflation on its way to zero or lower, we see good value in real yields today.  We expect rates to continue backing up through the first half of next year (beyond the imminent air pocket in risk assets directly ahead which should push yields lower) on a Washington inspired “recovery” before retesting (and probably breaking) prior “lows” later next year and into 2012.

Disclosure: At the time of publication, the author was long US Government Bonds, although positions may change at any time.