Bonds And Our Never-Ending Global Health Crisis

Market participants inundated with data and ostensibly meaningful policy banter will get a bit of a breather in the new week.

The data docket stateside is sparse. Housing numbers and claims are the only notables on a lonely-looking calendar, although preliminary PMIs from IHS Markit (Friday) may provide some scope for editorializing. There’s a 20-year sale on Wednesday.

“I don’t know what the next catalyst will be,” TD’s Priya Misra said, in fatalistic-sounding remarks to Bloomberg for a piece documenting the “mystery” bond rally discussed at length on Saturday in “Conniving Oracles.”

“Sharper declines in rates in US hours may be a function of short covering as CFTC data and surveys suggest that the market remains net short,” Misra wrote, in a note, adding that “pension demand and risk-parity demand for Treasurys may have added to the bid.” The tables (below, from TD) show you the breakdown on when bond yields are falling.

“The rally in European hours may be a function of global growth concerns, reach for yield, and Japanese demand (which tends to be seasonally strong in June-September),” the bank added.

If it’s higher yields you’re looking for (or betting on), the problem became readily apparent following the June FOMC. Markets seemingly pulled forward the bulk of the reflation trade into Q1. The Fed’s hawkish turn (last month) was set against what, anecdotally anyway, seems like skepticism around the medium-term growth outlook.

When a positioning squeeze triggered a sharp curve flattener, those already worried about growth viewed falling bond yields as confirmatory. The stage was thus set for macro events to be interpreted through the lens of a Fed on the brink of a policy mistake. The flattener became entrenched.

Although I doubt seriously that the Delta variant problem is finding expression in the bond market on a day-to-day basis, it’s wreaking havoc globally. Indonesia, for example, is in full-on crisis mode. A month ago, daily cases were just over 8,000. Now, they’re near 60,000 (figure below).

Some experts say the official numbers woefully understate the real total, which could be as much as six times higher. Let that sink in. The official daily case count is seven times what it was a month ago, and the actual count may be six times higher than that. Only 6% of the population is fully vaccinated, and the country’s reliance on China’s Sinovac shot looks to be a liability. Some two-dozen doctors in the country inoculated with the Chinese vaccine are dead from the virus.

In the US, the perils of pushing misinformation on an undereducated public continue to manifest in horrific outcomes. Over the weekend, The New York Times ran a piece documenting events in Mountain Home, Arkansas. “Barbara Billigmeier, 74, an avid golfer who retired here from California, believed she did not need [a vaccine] because ‘I never get sick,'” Sharon LaFraniere wrote. Unfortunately, Barbara got sick. So sick, in fact, that by her own account, she couldn’t breathe. And yet, she’s still not inclined to be vaccinated. “It’s just too new,” Billigmeier told LaFraniere. “It is like an experiment.”

No, Mrs. Billigmeier. I’m sorry, but it’s not “like an experiment.” That’s what clinical trials are for. Those are “like experiments,” and there’s a reason we run them prior to injecting 150 million people.

At this juncture, I’m fully comfortable saying that Fox News and any other outlets or portals spreading misinformation about vaccinations should be given one final warning, and then, if the issue persists, be subjected to whatever penalties the federal government can unilaterally impose. Social media outlets are a different animal, but suffice to say Facebook’s aggressive pushback against Joe Biden’s assessment that a failure to police and remove vaccine misinformation is “killing people” was wholly inadequate. Essentially, Facebook argued that because the platform promoted vaccinations and likely encouraged multitudes of Americans to get a shot, their role in perpetuating propaganda and conspiracy theories can be ignored. In an unusually scathing (for a media outlet) assessment, Bloomberg wrote Saturday that,

Social media influencers, legitimized by their sizable follower counts, had a full year to sow doubt about COVID vaccines before Facebook took significant action. They’ve exploited public confusion and mixed messaging from government and health officials on everything from masks to vaccine side effects and safety. Facebook’s official stance was that it doesn’t ban posts unless they “cause imminent harm” — a threshold the social network said vaccine misinformation only crossed months into a global inoculation campaign.

Mark Zuckerberg, for all his genius, still exhibits the mentality of a child at times. And I don’t mean that derisively. I mean it literally. It’s never been obvious, to me anyway, that he understands (let alone takes seriously) the concept of personal responsibility.

Twitter, by contrast, thanked the federal government for its leadership. “As the pandemic evolves around the world, we’ll continue to do our part to elevate authoritative health information,” the company said.

In any event, the newsflow around the pandemic is beginning to skew decisively negative again, and it may well be that what started as a positioning-driven bond rally triggered by a hawkish Fed morphs into an actual growth scare predicated on the realization that the world isn’t rid of COVID. In fact, some parts of the world are just now seeing the worst of it. Indonesia is where India was in May. Thailand logged a record 11,400 new cases on Sunday. South Korea is poised to ban private gatherings of four or more people outside of Seoul starting Monday. At least two Olympians tested positive at Tokyo’s Olympic Village. And in the US, misinformation is spread with impunity — as though we’ve forgotten that not all “speech” is protected. (If you yell fire in a crowded theatre knowing there’s no fire, you’ll be arrested. Never mind that the concept of a “crowded theatre” may no longer make much sense thanks to the pandemic.)

Coming full circle, we may not know what the “next catalyst” is for higher yields, but if the newsflow continues to deteriorate, it’s fairly obvious that at least one catalyst for still lower yields is the pandemic.

That said, I personally doubt the bond rally has much further to run barring some kind of truly dramatic macro shock that forces an across-the-board rethink of the global recovery thesis.

“One of our core tenets for this stage in the cycle is that unless there is a broad-based capitulation of the higher yield thesis, then there is a floor for how far rates can fall,” BMO’s Ian Lyngen and Ben Jeffery wrote. “Said differently, unless investors replace shorts with longs, 10-year yields are going to struggle to get below ~1.10%.”

A few months back, I spoke to my best friend from high school for the first time in… well, in a long time. I mentioned he might come visit once the pandemic was well and truly over. “Are you kidding?,” he said. “This is never going to be over.”