Bonds were the story on Friday, and really all week, with 10-year yields rising an astounding ~35bps, to 1.90%, pushing through the 50-DMA in the process.
The 2s10s steepened more than 4bps on the last day of the week, and briefly managed to peak its head above 10bps. Futures volume surged once yields moved through 1.85%.
30-year yields are back to 2.37%, a remarkable move considering nobody knew where the bottom was last month, when 2% was breached to the downside, prompting Steve Mnuchin to sound out the market on ultra-long issuance (again).
Meanwhile, traders are beginning to hedge a hawkish Fed, as solid incoming data and progress on trade sows doubt around next week’s meeting.
The question is whether the recent backup in yields is just a correction from August’s overshoot or whether it’s the start of “something” (don’t ask what, and nobody say “tantrum”).
If you ask Goldman, it’s “a bounce, not a trend”.
“The recent sharp reversal of yield declines has been real yield led, though the inflation component has also contributed”, the bank wrote Friday evening, on the way to recounting the contributing factors including upbeat US data, progress on the trade front and ECB dissenters.
“After the recent bounce, 10y UST yields are close to our Q3 forecasts of 1.85% [and] we do not expect yields to go substantially higher from here”, the bank goes on to muse, adding that if you ask them, “any truce in the trade war is likely to be temporary, and it remains unclear if fiscal and monetary policy in the Euro area will be sufficiently stimulative as to generate sustainable bearish impulses for bond markets in the near term”.
Actually, it’s hard to argue with either of those points, although it certainly does seem as though Trump is angling for some kind of agreement with China that helps allay recession fears among the electorate. On Thursday evening, the president said he’d be open to considering an interim deal with Beijing, contradicting the White House’s earlier denial of reports that a stopgap agreement was perhaps in the works.
Goldman also flags a potential risk from “hawkish” 2020 Fed dots. The bank is, of course, expecting a 25bp cut next week and another one by the end of the year, but if they’re correct to expect no further cuts after that, it could be a letdown for markets. “We expect this absence of easing next year to be reflected in the upcoming dot plot”, Goldman says, which means expectations for another cut in the first half of 2020 “could be vulnerable to Fed messaging”.
Whatever the case, we just witnessed a bond bloodbath of epic proportions. This is what you call a bad week for bond longs in ETF land…