And now, back to our regularly scheduled programming…
That is, back to the incessant overanalysis of the reflation trade. A trade which, if it didn’t die, at least suffered heart palpitations on Wednesday when the man in the blonde wig failed to talk about stimulating the economy at a highly anticipated press event (the first since his election if you don’t count the thousands of ad hoc pressers he’s held on his Twitter feed).
The market rendered its verdict via a blockbuster 10Y auction shortly after Trump stepped away from the podium. Shorts were covering. Indirect takedown was huge. Guilty as charged, Donald.
Where do we go from here? Will the Trump trade reassert itself with a few deft taps of the orange one’s thumbs (i.e. a few quick tweets about infrastructure spending)? Or will yields continue to fall as investors realize holding safe haven debt isn’t such a bad idea in a decidedly unsafe world? And what about the dollar? Greenbacks, blonde wigs, orange faces. It’s all too much.
Here’s Wells Fargo with a bit of color on this week’s action and a graph which demonstrates the extent to which DM rates no longer correlate.
Via Wells Fargo:
We agree that the Treasury sell-off is to a large degree an unwind of the Trump trade. We thought that U.S. markets moved too far, too quickly after the Nov 8 election. The 10yr Treasury yield rocketed in the last seven weeks of 2016, but this year has fallen notably versus levels of other sovereigns (Figure 2). The chart supports our theory that correlations, and more importantly betas, of global 10yrs will fall.