Former FX trader-turned Bloomberg contributor Mark Cudmore has had just about enough of you telling him why Treasury yields should be higher.
As you know, yields are saying something rather disconcerting about the outlook for the US economy. And notably, they seem to be saying something completely different than stocks:
Perhaps more concerning still is the rather dramatic flattening of the curve in what certainly looks like the market completely pricing out the Trump agenda:
This all coincided with aggressive covering of a previously sizable 10Y short by specs who in late April flipped long – yet another testament to a loss of faith in Trumpian reflation.
Well, coming full circle, the above-mentioned Mark Cudmore demands to know why you think Treasurys should sell off given the lackluster incoming econ data and the rather dour outlook for all of the policy proposals that were supposed to make short USTs one of 2017’s “no-brainer” trades. More below…
U.S. Treasury bears haven’t come up with a compelling new argument in months, nor a reason why any of the old, stale logic will suddenly become valid now.
- I frequently hear that Treasury yields are unsustainable. On what basis? During the last five years, the average 10-year yield has been 2.16%, right by the 2.19% midpoint of the 1.32% to 3.05% range. Historical context would suggest that the current level of 2.21% is barely worth commenting upon
- “But the Fed is raising rates.” So what? Even after the expected hike on Wednesday, the spread between 10-year yields and the effective rate will still be more than 100bps. The gap has been much narrower for extended periods during the past 20 years. So that issue seems perfectly sustainable and not relevant
- “But the Fed is overlooking the risk that the tight labor market means wage inflation will feed through to consumer price inflation.” Is it? Perhaps the committee is just focusing on the facts
- Bond bears have been trying to preempt this danger for more than two years. The most recent average hourly earnings print showed the slowest rate of growth in more than a year. The U.S. labor market is healthy, but the participation rate remains very low and the rise of machines is providing a disinflationary force. Most importantly, we’re definitely not seeing the impact on CPI yet. It remains a theoretical risk, and a receding one based on the latest data
- “But the U.S.’s growing budget deficit will add to supply, thereby forcing up yields.” Will it? That correlation during the past 20 years has been poor but, if anything, it suggests that yields actually fall when the U.S. deficit widens. Also, the deficit was significantly more negative between 2009 and 2013, so this seems a spurious argument at best, and potentially contradictory. With central banks pumping so much liquidity into the system and purchasing so many bonds, there’s arguably a dearth of supply
- The Bloomberg Commodity Index closed Monday at the lowest level in more than a year, so input prices are providing another disinflationary force
- I’m not particularly bullish Treasuries –- I think the market offers only poor risk- reward opportunities compared with other assets –- but if current yields are supposedly unsustainable, then all the evidence points to the fact that they need to come lower if anything