The bond rally accelerated early Wednesday in the US, which was a story in itself.
That is: Irrespective of how market participants chose to trade (or not) the June FOMC minutes, 10-year US yields at ~1.30% was notable.
Happily, that assertion inoculates this particular piece from becoming “stale” should the move reverse, but that wasn’t the intent (sometimes it is, but not here). This really was news, irrespective of whether yields drifted back higher.
Another (rather obvious) bout of position squeezes and stop-outs fueled an extension of Tuesday’s bond rally, which already had the potential to create what I’ve variously described as a “false optic” vis-à-vis the outlook for the economy.
Those kinds of false optics can become self-fulfilling. As I put it earlier this week, when yields plunge, not everyone is inclined to play “whodunit” or otherwise cite positioning, technical factors or a lack of liquidity for exaggerated price action. Some folks just see falling yields and hear “growth scare.”
JPMorgan cited short covering for the move. As Tuesday’s highs were breached, futures activity jumped, pushing yields to the lowest since February 19 (figure above).
“In the absence of reinforcement from the prior anchors of macro indicators, investors are left in the uncomfortable position of taking cues from the price action itself – a dynamic that has proven thematic throughout the pandemic,” BMO’s Ian Lyngen and Ben Jeffery said Wednesday, adding that “not only do the charts support another wave of bullishness, but the persistent short-base offers an obvious touchstone for lower rates in the event a trigger is on offer.”
This played out against ongoing “Delta” variant concerns and the realization that even as the US is virtually guaranteed to post blockbuster growth in 2021, the “peak” is already behind us. Both reals and breakevens have pushed lower (figure below).
Notably, the bond ETF (TLT, I mean) is overbought again — the 14-day RSI poked above 70 following the June FOMC and it did so again Wednesday.
As far as equities go, Goldman suggested that a “moderation in risk appetite is likely to drive a gradual normalization of investor sentiment and positioning” in the second half of the year. “Very bullish sentiment makes markets more vulnerable to shocks and increases the risk of sharp unwinds, especially past peak growth,” the bank’s Christian Mueller-Glissmann said.
And yet, there’s apparently nothing to be too concerned about. In the very next breath, Mueller-Glissmann wrote that the bank’s “base case of a moderate growth slowdown and gradual monetary policy normalization should be supportive of a gradual reset, similar to the low vol regimes in 2014 and 2017.”
Direction of interest rates is extremely difficult to predict. As you say, it could be that too many were short and now the momentum for the time being belongs to the longs. The economic concern I have related to rates is the flattening of the yield curve. Especially the bull part of the flattener. The Fed does not have that much influence over long rates- the message they are sending is not optimistic for the economy.