With 10-year US yields down to 1.60% and bund yields back to negative 38bps, bonds have thrown in the towel on Q4’s reflation optimism.
There’s a sense in which that doesn’t feel “fair” – after all, the data hasn’t been bad, and nothing has really “changed” from November/December to January in terms of the catalysts that underpinned the pro-cyclical rotation trade.
The problem so far in 2020 is that two left-field events (the assassination of Iran’s most revered general and, now, a burgeoning pandemic) tipped the scales back in favor of the vaunted “duration infatuation”.
Read more: Read more: Markets Ponder Return Of ‘Duration Infatuation’
The duration trade, in all its various manifestations, was (and still is) deeply entrenched. It was going to take more than a couple of decent manufacturing PMI prints and the signing of the “Phase One” Sino-US trade deal to break the spell.
“The question of ‘which way will Treasuries break’ has been answered over the weekend and with 10-year yields convincingly below the prior resistance of 1.70%, we’re decidedly in dip-buying mode”, BMO wrote Monday, adding that “the challenge now becomes gauging the extent to which the rally can run before a collective ‘rethink’ of the ramifications of the Wuhan virus comes into play”.
Right. The read-through is that, until there’s more clarity on the potential for the virus to spread, the bias for long-end yields will continue to be lower. Here’s the negative-yielding debt chart, current through Friday:
See that little blip higher over there on the right-hand side? Yeah, that “blip” is worth about $1.5 trillion – with a “t”.
In fact, the global stock of negative-yielding debt (i.e., what that chart shows), grew by $1.16 trillion last week alone, amid the flight to safety catalyzed by the virus scare. That was the biggest weekly jump since 2016. This speaks to why, on Friday evening, I was keen to suggest that the big story last week wasn’t the S&P’s worst week since August, but rather bonds.
Meanwhile, 5-year real yields sank to the lowest since early 2017 (see top pane below).
If you were hoping to get a bullish catalyst for your stash of carefully-polished yellow paperweights and/or your thumb drive full of inherently worthless digital, Chuck E. Cheese tokens, all of the above will work.
Stripped of the jokes, the point is this: Another upsurge in the global pile of negative-yielding debt and the lowest (most negative) 5-year real yields in nearly three years, are good news for gold and Bitcoin, as much as it pains me to say that.
As far as what comes next for bonds, BMO notes that eventually, “the subsiding of coronavirus fears will ultimately be an event worth 20-30 bp in 10-year yields, however, if rates bottom closer to 1.50% (or below) the upper-bound of 1.95% has little chance of being breached”.
So, watch your coronavirus headlines. That’s all that matters for the next week.
Well, that, and tech earnings, of course.