In an interview following Thursday's decision by the European Central Bank to cut interest rates and engage in a form of quantitative easing the Federal Reserve has followed for years, Tepper said, "It's the beginning of the end of the bond market rally. We are done."
After the ECB announcement U.S. Treasury yields rose. Tepper seems to think an increase in inflation is the bane of the bond market as seen in the performance of the iShares 7-10 Year Treasury Bond (IEF) exchange-traded fund.
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But the ECB's buying of bonds would seem to spur the carry trade more than serious inflation in the short run. Spain's unemployment rate is 24.5%, according to the Economist, and its 10-year government bond rate at 2.15%. Compare that with the U.S. unemployment rate of 6.2% and a government bond rate of 2.38%.
The bond bubble will pop. The key question is when. Tepper seems to be trying to call the top. There was some momentum since Labor Day, which may have been due to Appaloosa Management's taking a short position in Treasuries.
Investors have enjoyed falling interest rates for a long time. That means Treasuries have been a safe bet. Treasuries rally when there is turmoil or economic weakening, so a long Treasury position is essentially portfolio insurance. If you are a stock market bull like Tepper, we can't have an improving economy and low bond yields for much longer. Better macro data will push the Federal Reserve to raise interest rates and eventually pop the bond bubble.