Bond Sell-Off: Two Brokerages Face Off

Bond Sell-Off: Two Brokerages Face Off:

"In our opinion, the market has overreacted," countered UBS in a note from its analysts.

Central to both opinions is the guessing game surrounding the Federal Reserve's bond buying through its so-called quantitative easing program (QE3). As the economy improves and the need for the program wanes, the Fed is expected to "taper" off the bond buying. When that happens, or when the market collectively thinks it is about to happen, bond prices are expected to generally sink as a major buyer leaves the market.

Recent comments from Fed officials, and testimony from Fed Chairman Ben Bernanke in particular, led to slight drop in Treasury bond prices and a rise in their corresponding yields recently.

"We were surprised by the Treasury sell-off last week in response to the various Fed speakers. Chairman Bernanke's testimony to the Joint Economic Committee seems particularly even handed," the UBS analysts declared in the note. "…Sure, the Fed could taper in the next couple of months, but it still seems very unlikely."

Indeed, UBS argued that the 10-year Treasury note, currently trading at a yield of around 2.17 percent, is roughly 50 basis points over-valued.

To use an old cliché and state the obvious, only time will tell who's right. And while it's entertaining to watch the face off, it's important to remember the debate is critical to bond market investors. If you own bonds right now, mistiming when they might decline in value could cost you a lot of money.


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