If you’re in the camp that thinks subdued inflation is a good excuse for preemptive Fed cuts, there’s been no shortage of confirmation bias over the past seven days.
A week ago, average hourly earnings came in cooler than expected for May, CPI missed on Wednesday and then, on Friday, University of Michigan expected change in median prices during the next 5-10 years fell to 2.2%, a record low.
Decent retails sales notwithstanding, fading the Fed cut narrative seems to get harder and harder by the day. The U. of Michigan print suggests consumer expectations are now lining up with market expectations. That’s not exactly a comfortable situation for policymakers, although the Fed would say this is precisely why they’re conducting a sweeping review of their framework.
With that in mind, and considering the deteriorating outlook for the global economy and rampant geopolitical uncertainty, it will perhaps come as no surprise that according to the latest edition of BofA’s rates and FX sentiment survey, the “duration infatuation” has hit post-crisis extremes. As the bank writes, “investors have extended their US duration longs to a post-2009 high and approaching extremes, with USTs being viewed as the most effective risk off hedge.”
“Certainly, the one-way bet leaves the Treasury market vulnerable to good news, such as retail sales this morning, but as long as trade uncertainty lingers, it’s difficult to see a sustained bond selloff”, Bloomberg’s Ye Xie writes, adding that “if anything, investors seem to be ill-prepared for an escalation in the trade war.”
That latter bit is a reference to another finding from BofA’s survey. According to the 62 fund managers representing nearly $700 billion in AUM who participated in the June edition, the G-20 will produce a can-kick from Trump and Xi.
Note that only 18% believe it’s possible the two leaders won’t meet or, if they do, will fail to agree to a ceasefire. That, despite multiple media reports suggesting a face-to-face isn’t a sure thing, let alone a deal that sees tariff escalations postponed.
In any case, if you were wondering how bullish folks are on Treasurys, the answer, apparently, is “extremely”.