It’s no secret that everyone jumped the gun on the whole Trump-ian “reflation” trade in the immediate aftermath of the election.
Headed into 2017, short USTs and long USD were the two of the most crowded trades on the planet.
Everyone seemed to assume that the combination of a Republican-controlled government and a President who describes himself as God’s gift to deal making would result in the near instantaneous implementation of an agenda that included tax reform, fiscal stimulus, and deregulation.
Then, in relatively short order, rates and FX realized that Donald Trump was still… well… Donald Trump. Recall DealBreaker’s hilariously apt account:
His election gave us the “Trump Bump” which was bizarre, entertaining and wildly profitable for many, but then it seems like we forgot to correct for the data point that Donald Trump is the f*&%ing President of the United States.
Right. And once that “data point” was factored in, the dollar went into a veritable nosedive and instead of selling off, Treasurys rallied as yields on the 10 fell from a post-crisis high of 2.63-ish all the way down to below 2.02 earlier this month.
And don’t you for a second think that Trump isn’t mostly to blame for the dollar’s trials and tribulations and also for the utter confusion in rates. Yes, the policy divergence theme that dominated headed into the year would have probably faded anyway thanks to a hawkish Draghi and a political situation in Europe that brightened considerably after Marine Le Pen was trounced in the French election. But the transformation of the policy divergence theme into a policy convergence theme was supercharged by the fact that Trump’s learning-by-doing approach to the presidency made it well nigh impossible for Janet Yellen to lean any semblance of hawkish for fear that putting anything but a dovish spin on rate hikes would risk giving the market the impression that she was about to hand the baton to a “mentally deranged dotard” whose CV lists “WWE Hall Of Famer” under “distinctions and honors.”
And so here we are, with tax reform finally getting some momentum and taking the dollar and yields along for the ride. With the reflation narrative thus starting to resurface, Bloomberg thought this was a pretty good time to step back and reflect on the extent to which Trump has completely confused every rates strategist on the planet. Consider this:
The world’s most important bond market is stuck in its worst rut in more than half a century.
Ten-year U.S. Treasury yields have been locked between 2.01 percent and 2.63 percent in 2017 — a measly 62 basis points. That’s the tightest trading range since 1965, when William McChesney Martin ran the Federal Reserve, Lyndon B. Johnson was president and Frank Herbert’s sci-fi classic Dune hit shelves. And it’s less than half the annual average span of 175 basis points, according to data compiled by Bloomberg.
Analysts who less than six months ago predicted that the 10-year yield would end the year at about 3 percent have since brought their median forecast down more than 50 basis points. Investors say yields will continue to be constrained by mediocre growth, tepid inflation and a Fed that’s revised down its estimate of the terminal fed funds rate amid a well-telegraphed tightening cycle.
Right. Blame it on “mediocre growth, tepid inflation and a Fed that’s revised down its estimate of the terminal fed funds rate,” if you like.
Or be realistic and blame it on the simple fact that the long-term outlook is hopelessly cloudy.
Not only do we have absolutely no idea what the political environment will look like a year from now, we don’t even know what the situation will look like an hour from now because at any moment, Trump could throw away everything with one errant tweet about a GOP lawmaker he’s angry at.
Just today for instance, Axios reported that the President has been “physically mocking John McCain” in private meetings by “imitating the thumbs-down of his historic health-care vote.” That prompted an incredulous tweet from Meghan McCain:
If you think that kind of thing doesn’t affect fiscal policy, well then just go back and look at how many times McCain has played spoiler this year and then ask yourself if maybe that doesn’t have something to do with Trump saying he “isn’t a war hero.”
Additionally, all you have to do is look at a 1-month chart of the 10Y to see how Trump’s increasingly bombastic rhetoric re: North Korea has the potential to spark a safe-haven bid at the drop of a hat, thus undercutting anyone who’s betting on a sustained spike in yields.
Meanwhile, the outlook is complicated even further by the fact that no one even knows if Trump will be President for his entire term. Maybe that helps to explain why even the short-run forecasts are all over the map:
So if you’re looking for direction here, good luck.
You’re probably better off watching Twitter than you are listening to Yellen speeches.