10-year yields yo-yoed on Monday, as markets coped with the fallout from one the most consequential geopolitical escalations in recent history.
At 1.78%, we’re now well off the recent, reflation optimism-inspired highs. The safe-haven bid across markets over the two sessions since the assassination of Iran’s most legendary general has put the brakes on the nascent bond selloff that some believed would push benchmark yields stateside beyond 2%.
A deluge of supply could help reverse the bullish momentum this week and indeed, Treasurys moved back to little changed during the US morning, on decent data out of the UK and ahead of issuance from the US, Japan and France.
At the same time, crude is obviously surging on the same geopolitical tensions that have, temporarily anyway, capped the rise in DM bond yields.
To what extent are trend followers likely to contribute to the next potential leg lower for yields or higher for crude?
Well, if you ask JPMorgan, “CTAs are likely to amplify bullish momentum [for crude] in the coming weeks now that longer-term and shorter-term signals are now all bullish”.
“We noted in early December that the switch in the longer-term signal for Brent to long territory for the first time since mid-September could see CTAs add to bullish momentum over the following weeks”, the bank’s Nikolaos Panigirtzoglou writes, in the first Flows & Liquidity of 2020.
“This week, following the escalation in geopolitical tensions, the rally in oil has taken the longer-term signal for WTI also to long territory, he goes on to say.
As far as bonds go, Panigirtzoglou writes that the market reaction to the Mideast drama has flipped the short-term signal for Treasurys.
“In bonds, the recent re-intensification in geopolitical tensions in the Middle East has seen our shorter-term indicators approach bullish territory for 10y USTs intraday on Friday, which could see some near-term support from momentum-based investors that place more weight on shorter-term signals adding some long exposure”, he notes.
On Friday, Nomura’s Charlie McElligott also identified the possibility of re-leveraging from trend followers in bonds and rates.
You’ll note from the the visual that the long-term momentum signals in JPMorgan’s models have been decaying steadily. That’s potentially important in the event yields do begin to move higher again.
“From current levels, it would take around a 50bp rise in yields for the longer-term signals to turn short duration in the near term”, Panigirtzoglou goes on to say, adding that “as the period of higher yields during late 2017 and 2018 begins to fall out of the lookback horizon, this ‘momentum decay’ reduces the hurdle to around 30bp over a two-to-three month period”.