Tuesday’s economic indicators had the pundits finally gasping for air. How wrong can you be…? Some of those who were bent on that the stimulus mania would create a monster of an economic recovery and bring back Weimar-esque inflation must be blushing of shame. Both the ISM Services index and the Market PMI hugely disappointed, tumbling from 64 to 60.1 and from 70.4 to 64.6, respectively, and put another nail in the coffin for the Treasury bears.
As this space had suggested in early March that 10-year Treasury yields would top out around the 150bp area,
here, and insisted again from early June that we had reached and were in the process of forming a top in long yields,
here,
here and
here, the long end has literally collapsed in the past two trading sessions. The 10-year dipped through a yield of 1.30% intra-day, a whopping 45bp tighter than the March high, and the 30-year crashed back below the 2% threshold.
Only last week I mused whether we were likely to zoom in on the 1.25% mark before anything else. This will now be a key technical support at the 200-day moving average. If it doesn’t hold, I believe the 10-year has a good chance to re-test the 1% again, a reading we have last traded on in January. The 30-year, on the other hand, has already severed that very moving average support line in a clean cut, so that may well be a harbinger of what to come across the entire long end of the curve.
I am very cognisant that this has been a view at fundamental odds with almost everyone on the planet, but I have always had comprehensible reasoning for it. One, the bond market has moved too fast and too quickly on the misguided notion that stimulus will be the saving’s grace in the wake of the pandemic. The investor community was almost uniformly directionally short Treasuries, and people just wanted to believe the fairytales of 10-year rates eclipsing 2% and rising to 3 or even 4%.
In other words, part of what we are witnessing is a collapse in shorts and a wave of squaring these positions. The diehards have held out stubbornly, and there may still be many left out there, but with every confirmation that the narrative ain’t so an increasing number of them are throwing in the towel. Two, as hard as it may be, we will have to come to terms with the fact that not all is gold that shines. The economic sugar high we have been on for a couple of months will not be sustainable going forward.
The distinctive topping out of long yields across the past 3-4 months was more or less created by the smart money that smelled the cake early (or maybe they are firebrand
Expertise Asia readers 😉), and now the institutional guys are following suit. Pension funds and life companies, the natural domestic buyers of duration government bonds, had held off employing new funds amid the mainstream bearish thinking, but they are back trying to lock in yields that were not to be had for a whole 18 months.
Let’s keep watching this price movement. I am very happy to remain the controversial one and bet on lower yields rather than higher ones.
