I think 2-year notes yields will go higher (2-year note prices will go lower).
- The Fed has hiked the discount rate. There is not much practical significance to this action – what matters is the Fed Funds target – but I think it provides an important indication of a shift in the Fed’s thinking.
- The Fed’s QE programs are about to end
- The unemployment rate is starting to turn. It went to 10.1% in Oct 2009 (the highest level since June 1983), then it dropped very slightly to 10.0% in Nov 2009, and then it dropped again to 9.7% in Jan 2010. It remains to be seen whether 10.1% in Oct 2009 is THE peak, but it is at least A peak.
Right now, 2-year notes yield 81 bps. I think we’ll see 2-year note yields rise at least 20 bps within six months.
Recommendation: short 2-year notes (or sell 2-year note futures).