I’m Old Enough To Remember The Bond Selloff

So much for 1.25%.

Late last week, I wrote that the US 10-year was “basically just loitering at 1.10% looking for direction.” The market absorbed January’s heavy supply, digested the “blue sweep,” took account of Joe Biden’s $1.9 trillion stimulus plan, and listened to Janet Yellen chat with lawmakers about a 50-year bond. None of that was enough to catalyze the next leg higher in yields, where that means Buzz Lightyear-style cries of “To 1.20% and beyond!” As I put it Friday, 1.25% was starting to “look like Mount Everest.”

Fast forward to Monday, and bonds staged one of their best rallies since November, with yields richer by 6bps out the curve. The 2s10s was the flattest since January 7.

“While this week’s supply dynamics may weigh on the front- and belly of the curve, demand from portfolio extension ahead of Friday’s month-end may help underpin the long-end,” Bloomberg’s Edward Bolingbroke noted.

Part of the move lower in yields was attributable to what could end up being a monthslong delay in Congress passing the next virus relief package. Chuck Schumer on Monday suggested passage may have to wait until mid-March.

It’s obviously not possible to say how many lives Biden’s plan would save, but we do know that tens of thousands of Americans will die from COVID-19 between now and March, when key provisions under the current stimulus package will lapse.

While it’s true that many of those fatalities are sadly inevitable, it’s also true that passing Biden’s proposal isn’t likely to kill anyone.

So, setting aside concerns about the deficit, it’s a bit hard to accept the idea that a two-month delay is a net “win.”

“We expect something closer to $1 trillion will be legislated by late February or early March,” Deutsche Bank’s Steven Zeng said.

“Tweaking our model projections for this assumption, we anticipate bill supply will remain relatively flat through February and needs to rise only modestly in March if the Treasury keeps coupon size unchanged for the next quarter,” Zeng went on to remark, in a Friday note.

Of course, this week features plenty of potentially market-moving events including the Fed and the first read on Q4 GDP. By Friday afternoon, things could look materially different, although honestly, it’s hard to see much on the calendar with the potential to catalyze a steep selloff in rates.

For now, the overarching message appears to be this: Just as the pro-cyclical trade in equities may have gotten out over its skis, so too did the bearish bond bets.