The 5-year Treasury (CBOT:ZFH14) is entering a new phase in its existence. For now it will be measured as to how much of its life will be spent beyond zero interest rate policy (ZIRP). Until now, it was a glass half-full. Now economic agents concentrate on there being more than 3/5th of the current 5-year expected to be buffeted by the potential for policy rate hikes in a process of monetary policy normalization.
That normalization of monetary policy will be further challenged by the very strong likelihood that the Fed will be holding onto its massive portfolio, not wanting to take actual losses that can otherwise, through time, be eliminated by allowing the securities to remain on Fed books till maturity. Because of the stimulative effect from these balance sheet holdings, the Fed will be required to count on the policy Fed Funds rate to do even more 'heavy lifting.'
While the Fed will be very interested in convincing economic agents that their intent will be to raise policy rates in due time at a very measured pace, the reality is that at some point, the Fed may be required to play catch-up and will need to use the Fed Funds (CBOT:ZQG14) more aggressively in combating excesses. This is why the 5-year will have a very hard time of it and why it will suffer relative to the 30-year (CBOT:ZBH14), which itself will benefit from a good chunk of its outstanding being squirreled away in Fed coffers.