bonds Markets

Bonds At The Crossroads…

Where to now?

On the heels of a harrowing rout that at one point looked poised to push 10-year yields through 2% and beyond, bonds bounced back this week, amid lingering trade doubts and disquieting (if not overtly dour) economic data.

It was the ninth weekly decline of 10bps or more this year for 10-year yields stateside. As Bloomberg’s Luke Kawa observed in his weekly fixed income letter (which I still can’t figure out how to direct people to, so if you have questions, maybe just tweet to him), that’s “the most for any year since 2015”.

TLT, which suffered its biggest weekly outflow on record earlier this month, bounced back to log a decent gain.

Indeed, it’s even possible to spin some of the week’s good news as “bad” for bond bears. Germany avoided falling into a technical recession in the third quarter which, ostensibly, should bolster the case for higher yields. Or at least until you consider what the better-then-expected number means for the already slim odds of a serious fiscal push out of Berlin. The fact that the German economy isn’t in a recession (or at least not on a technical definition) will only serve to harden fiscal hawks’ commitment to strict budget discipline. Hence, the odds of a big fiscal stimulus package are now even more remote, and that isn’t the best news for the reflation narrative.

Meanwhile, some of the technical factors that exacerbated the bond rout have probably run their course, barring another catalyst.

“We believe CTAs are likely close to being done with duration unwinds after last week’s move in rates”, BofA’s Carol Zhang wrote Friday, adding that “this is also consistent with our observation last week that momentum traders are much less sensitive to rates moves”.

(BofA)

Nomura’s Charlie McElligott recently called for a pause in the bond selloff as well, noting that historically, after big duration purges which were preceded by months of duration accumulation, bonds tend to stabilize or outperform for a spell.

Read more: After The (Duration) Purge…

For their part, Goldman notes that their options-implied positioning indicators for USTs and German bunds betray some risk of a further selloff in the near-term, although the medium-term outlook is balanced.

(Goldman)

And besides, the bank says, there would need to be a catalyst, e.g., an actual, concrete announcement of tariff rollbacks or serious upside in the incoming data to suggest the global economy has finally turned the corner.

Even then, the bank doesn’t see much room to run.”Our analysis suggests however that any selloff would likely be shallow, and 10y Treasuries will struggle to move sustainably above 2%”, Goldman remarks, adding that “policy expectations having reset lower over the past year [so] much of the heavy lifting will have to be done by inflation risk premia and therefore, breakevens”.

Meanwhile, you’re reminded that the fate of the Min. Vol. bubble hangs in the balance. If you’re still piled into that trade, just note that you are implicitly praying there’s not another sharp leg higher for yields (leg lower for bonds).

Read more: Is The Min Vol Bubble Bursting?

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