Heresy! Don’t Doubt The Narrative

It seems like I’ve been chained to this damn keyboard writing about 10Y yields and the long USD thesis for five straight days.

Oh wait, that’s because I have.

On Friday, I cited Bloomberg’s Mark Cudmore, who reiterated my own feelings about the increasingly repetitious character of the research coming out of the Street. “Every day is about Trump and every note is about the same four or five crowded trades,” I said on Wednesday. “I’ve been overwhelmed by the number of analyst notes recommending that the correction in the Trump victory-related themes – stronger dollar and higher yields as the most prominent ones — has already gone too far and provides a great ‘opportunity’ to add to positions,” Cudmore said early Friday morning. “It’s verging on religious fervor,” he added.

And while I generally agree with the notion that yields are headed higher (hell, we may even get a good old fashioned VaR shock during the summer) and the dollar bull thesis looks strong, I also agree that the reluctance to speak ill of these trades suggests that perhaps the market has become too wedded to the reflation narrative. Cudmore continues:

There’s been little this week to boost the fundamental argument for a stronger dollar accompanied by higher rates. Trump’s press conference didn’t outline an expedited stimulus plan. In fact it’s arguable that it implied a massive fiscal jolt may be less probable.

Heresy!

Perhaps.

But if it’s a sin to doubt the prevailing narrative, then count SocGen among the sinners. Below, find some color out Friday that sheds more light on where we stand on the Trump trade.

Via SocGen:

The fear of a ‘buy the rumour, sell the news’ phenomenon is causing some covering of the crowded Treasury shorts. Though our fundamental view remains confidently bearish for this year, the tactical bias is more prudent. Our technical analysts suggest 2.28% and 2.15- 2.17% as potential 10yT targets for this correction. As such, we continue to investigate trades that partially and cheaply hedge structural bearish positions.

We said last week that the main risk to our bearish view was (crowded) positioning, and indeed we are seeing more evidence of a wash-out of the ‘Trump’ trade. The fact that he avoided discussing fiscal policy in his 11 January press conference only supported a ‘sell the news’ correction after global markets enthusiastically front ran the policy change (i.e. bought the rumour). 10yT has returned to the levels that preceded the 6 January NFP report.

So far, the covering of crowded positions has been most obvious in rates and, to a lesser extent, FX, while US equities have been resilient (SPX still up this year, if looking tired).

Graph 1 shows the significant bull flattening in USD rates since 27 December. Remarkably, in the bond space, the rally has come entirely from the real side, as positive inflation news has kept breakevens supported. For instance, the 10y TIPS yield has halved since mid-December, from above 0.70% to 0.35%. That has supported a USD pullback, though the latter has been relatively muted (Graph 2).