By the time it was all said and done, this was the second worst week for the long bond ETF since the election.
TLT collapsed more than 4% over the last five days. The only week worse than this one for the product (dating back to November 2016) was the meltdown in early September, when yields surged off the August nadir.
You can thank trade optimism for the bond selloff, but supply played a role, as did CTA de-leveraging and the spillover from a similar rout overseas, although that latter bit is always a bit of a chicken-egg scenario.
“The sell-off thus far has been global in nature, largely driven by positive news on fundamentals (on average, economic data have been coming in better than expected) and a diminishing of risks (improvement on US-China trade war, drop in odds of a no-deal Brexit)”, Goldman wrote Friday evening, adding that “a further sell-off leading to a range break could see a modest mechanical acceleration of the move [as] investors appear to have built up sizable options positions that would be adversely affected by a move higher in yields from current levels”.
Reflecting on the recent move in yields, which have now erased the August plunge, putting 2% on 10s squarely in play (one more positive headline around the trade deal is probably all it will take), BofA notes that in the latest edition of their FX and rates sentiment survey, “investors have completed the duration round trip”.
The poll, conducted from November 1 through November 6 and taking the pulse of 57 fund managers responsible for a combined $955 billion in AUM, shows that after starting the year neutral and then building the “most significant duration overweight since 2008/09, duration sentiment has turned negative”.
For the bank, this may mean that the market has become too comfortable with the trade outlook and/or with the prospect of a turn in the economic data.
“This suggests that the risk to markets is increasingly that a [trade] deal fails to materialize – a lot of good news has now been priced in”, the bank cautions.
As for what those same 57 fund managers think about the “Phase One” deal, 65% see the formalization of a “skinny” agreement which delays some tariffs including the closely-watched December 15 escalation.
You’ll note that more than two thirds now see the market’s expectations being validated.
Although that does, indeed, seem like the most likely outcome, Donald Trump’s Friday remarks should serve as a reminder that nothing is written in stone when it comes to this administration.