2023’s “year of the bond” mantra continues to disappoint investors who mistook a narrative for a trade recommendation.

I’d say lesson learned, but nobody ever learns. Anything, really.

On a day when news out of China dominated financial media headlines, one other story managed to grab some attention: Treasury yields were higher from the belly on out the curve. 10-year yields were the highest since October.

The selloff wasn’t especially pronounced, but it was notable nevertheless, and not just from a “cycle-high yields” perspective. Consider the following:

1. Markets were taken aback by a very poor Japanese bond auction, which saw the largest tail since 1987. That raises considerable doubts about clearing prices for JGBs, which is uncomfortable in the context of an eventual BoJ YCC exit.
2. It says something about the persistence of structural concerns tied to larger US deficits, heavy Treasury supply and the prospect of a higher long run neutral rate, when long-end US yields are at or near cycle highs despite a three-week slide for equities.
3. It would appear that real money selling domestically (as longs throw in the towel on a US recession that’s apparently never coming) may be conspiring with foreign official selling (as central banks attempt to arrest currency depreciation against the dollar) to weigh on Treasurys.

“YTD, we have seen a large net buying of duration… in anticipation of a recessionary slowdown which never materialized [and] those purchases are painfully underwater, particularly into a still-too-strong economy and with a latent Treasury supply shock looming,” Nomura’s Charlie McElligott remarked.

“So, you’re getting real money now attempting to shorten their duration and making increasingly capitulatory sales acting as synthetic short gamma in the market,” he went on. In other words: Underwater longs may be selling into the selloff, and it’s not obvious that dealers would be eager buyers given the supply backdrop.

All of that’s important when you think about Treasurys, and it makes for a remarkable juxtaposition with record inflows to US bonds. Note that global sovereigns have saddled investors with losses in 2023, a bitter disappointment in light of the (so-far-false) narrative mentioned here at the outset.

A Bloomberg gauge of global govies is down more than 1% after galloping out of the gate to a 4% gain.

“The crucial difference between [October’s highs for 10-year US yields] and now is that October’s downtrade was a function of both higher breakevens and real yields, while the current episode is entirely real driven,” BMO’s Ben Jeffery and Ian Lyngen wrote late Thursday.

They offered a familiar word of caution, which has been borne out this month, if not yet in dramatic fashion. “The longer inflation adjusted borrowing costs stay this high, the greater the fallout will be in terms of economic activity and risk asset valuations,” they said, adding that “with Friday’s data calendar empty and no scheduled Fedspeak ahead of the weekend, we’re open to the assertion that developments in China hold the potential to drive a more meaningful share of the price action — at least until Jackson Hole.”