Were We Too Quick To Write The Bond Bull’s Obituary?

Don’t look now, but the Treasury ETF is nearly overbought (figure below).

I say “the” Treasury ETF like there’s only one. But you know what I mean. TLT, after sliding a god-awful ~14% during Q1’s bond rout, is gunning for a fourth consecutive weekly gain.

On Wednesday, benchmark US yields broke below 1.50% for the first time in a month. The 10-year re-opening went swimmingly. “Had to have ’em,” BMO’s Ben Jeffery said. “You could argue some shorts must have bid at auction to cover,” Bloomberg’s Cameron Crise remarked. Dealers took just 15.7% of the sale. 10-year yields fell as low as 1.471%.

Irrespective of what happens for the balance of the week, this was an amusing development coming just a day ahead of May CPI in the US. In many ways, 10-year yields breaching 1.50% (on the downside) feels like the culmination of a weekslong grind during which market participants gradually acquiesced to the Fed’s narrative and accepted the notion that the inflation “overshoot” story may have been priced in during Q1’s bond selloff.

Also on Wednesday, eurodollar hedges playing for a hawkish Fed turn were unwound amid what Bloomberg’s Edward Bolingbroke described as a “persistent short-covering rally.”

Solid auction results suggest demand for Treasurys isn’t a problem despite ongoing jeers from the peanut gallery about reckless fiscal largesse. The bond vigilantes are in retreat after pushing yields “all” the way to a “dizzying” 1.77%. (I sincerely hope you’re picking up on the sarcasm — that’s what the scare quotes are for.)

“Regarding the taper discussion, we think it will be difficult for Chair Powell to keep the April view that now is not the time to discuss reducing asset purchases,” UBS said, previewing the June Fed meeting. “We expect he will say that the debate has not kicked off but that, if the economy continues to make rapid progress towards the goals, the time to initiate the discussion will probably be in the coming months,” the bank added, before noting that even if Powell communicated that the debate “already started at the June meeting, we think he would emphasize that it will still take ‘some time’ for the conditions to start tapering to be achieved.”

Commenting ahead of the May CPI report Thursday, Nomura’s Charlie McElligott laid out the two possible outcomes:

A “miss” could really lend credence to the Fed’s “transitory” view and thus drive a squeezy rally in USTs, large bull-flattening in curves, as legacy “Short Treasurys” and curve bear-steepening “reflation” bets are capitulated out-of;

OR, conversely, a second consecutive “beat” could [boost] confidence in recently fading “reflation” bets, and particularly with all this “short Vol” supply at risk of squeezing higher—especially if realized inflation then accelerates past currently-priced and very stable inflation expectations

As another bank put it Wednesday, “the CPI print tomorrow can completely change the picture.”

Whatever the case, on Wednesday afternoon US yields were nearly 30bps below YTD highs. This is why I’ve been reluctant over the past several months to declare the four-decade bond bull well and truly dead.