HSBC Still Betting on Treasuries

With the 10 year breaking below 3%, HSBC's Steven Major is out with a research note arguing that the bond rally still has more room to run, even without QE 3. The bet is that this recent rally in Treasuries, has caught many fund managers (like Bill Gross of PIMCO) on the wrong side of the trade. These treasury bears are scrambling to cover their short positions, sending Treasuries higher. His short term price target for the 10 year is 2.6-2.7%. Major notes:

"The factors driving yields lower are still unraveling," said Major in a phone interview with Dow Jones Newswires. "We are still getting evidence of a weak economy, still seeing stress in [the] euro zone and still seeing short covering."

Major said there are still large amounts of shorts in the market, adding that the bond rally will end when those shorts "capitulate."

But Major said that a third round of quantitative easing from the Fed is unlikely even as the economy is slowing.

"I think the Fed will save it for a more serious deflation risk, not lower-than-expected growth," he said.

The only thing I disagree with is the suggestion that QE 3 is unlikely. In fact. the recent bond rally could be the market pricing in QE 3,4,10,20,etc. The truth is that we are a 10-15% correction away from QE 3. The Fed has made a higher stock market a top priority to "increase the wealth effect." To bad the average American has less than 50k in their retirement accounts, so a rising market does little to counter the ruinous impact of rising food and energy prices. But then again the Fed's single goal is to sacrifice the American middle class to save the major banks through a back door bailout known as ZIRP.

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HSBC Still Betting on Treasuries