S&P ‘Negative Outlook’ May Be a Catalyst for a Trade in Treasuries

From a contrarian perspective, the announcement by S&P that they have placed a negative outlook on the United States may actually serve as a buy signal to initiate a trade in U.S. Treasuries.

Several factors support this bullish case:

1. The Treasury market appears to have bottomed – After reaching a low in early February, the Treasury market has been gradually picking up momentum to the upside and is setting up well from a technical perspective.

2.  The ‘negative outlook’ announcement is a call for fiscal discipline – While it’s already a growing topic in Washington, such a headline event will encourage even greater emphasis on getting fiscal spending under greater control.

3.  QE2 is ending in June – The last time Treasuries rallied was following the end of QE1.  If the economy is not strong enough to hold up without government stimulus, investors may move to safe haven Treasuries

4.  Major buyers have already exited the market – As an example, PIMCO, which is the largest bond fund in the world and one of the largest holders of U.S. Treasuries, has already made it well known that they have fully exited the Treasury market.  As a result, they will be a net buyer of Treasuries if anything going forward.

Any positions, particularly longer duration exposures including ETFs like IEF and TLT, should be viewed as short-term trades at this stage, as more work must be done in Washington to change the long-term view.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

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