The “duration infatuation” ebbed a bit in August as investors took advantage of the mammoth bond rally to sell into strength and cut their duration longs, according to the latest edition of BofA’s FX and Rates sentiment survey, which represents 59 fund managers with nearly $730 billion in AUM.
Tellingly, Treasurys remain appealing on a cross-market basis, as the exposure spread between USTs and core EGBs neared a record.
“This reflects both a growing conviction that trade wars will not be resolved anytime soon, and that the Fed may need to cut meaningfully more”, BofA writes.
(BofA)
Yields have risen sharply in September amid trade optimism, decent data in the US and a generalized sense among investors that the August bond rally was overdone.
Indeed, 10-year yields in the US are up nearly 40bp from the lows, while bund yields are back to -0.47% from -0.72%.
Benchmark yields in the US jumped another 12bps on Friday following better-than-expected retail sales data for August, which helped to allay fears that trade war uncertainty will lead to retrenchment from consumers. It was on track to be the biggest weekly rise in 10-year US yields since the election.
Respondents to BofA’s survey generally don’t believe rates will eventually “catch up” to equities, but rather think stocks will “catch down” (as it were) to what will be seen, in hindsight, as the economic “reality” of lower yields.
(BofA)
Asked to explain last month’s 2s10s inversion (which catalyzed the worst day of the year for the Dow and prompted Donald Trump’s instant classic “CRAZY INVERTED YIELD CURVE” tweet), participants overwhelmingly cited either 1) expectations for lower growth and muted inflation or 2) bloated central bank balance sheets and the effects of unconventional monetary policy.
(BofA)
Note that only 3% of respondents cited convexity flows, which multiple desks said explains at least half of the August rally in the long-end of the US curve and thereby a good portion of the bull-flattening impulse.
Finally, note that 10% of those surveyed said Germany “will never change” when it comes to the “black zero” fiscal policy that finds Berlin reluctant to countenance stimulus despite what looks like an inevitable recession and the ability to borrow for free.
(BofA)
You’re reminded that if someone asked you to make a list of things that could meaningfully change the narrative, restore faith in the reflation story and get bond yields moving sustainably higher, German fiscal stimulus would be in the top five, along with a “kitchen-sink” stimulus push from China and, of course, MMT in the US.
