Early last month, during a fleeting rally for the otherwise beset US long-end, I called the bond bounce a “false dawn.”
The short-lived decline in yields was predicated on the first of what would end up being a long run of relatively dovish Fedspeak which suggested higher yields could potentially substitute for the final rate hike tipped by the September dot plot.
If you see a self-defeating dynamic there, you’re not wrong: By suggesting higher long-end yields could stand in for a rate hike, the Fed triggered a decline in those same yields. That’s yet another testament to my long-standing contention that the Fed over-communicates to its own detriment.
There was also a safe-haven bid in play around the onset of full-on hostilities between Israel and Hamas. That safe-haven premium quickly evaporated, as did the entire rally, and within two weeks, yields were back near the highs.
This week, bonds are again trying to rally, and it feels at least incrementally more convincing this time. On the heels of the BoE decision and a spate of dovish data, 30-year Treasury yields were 15bps lower, and nearly 25bps below Tuesday’s close.
Compared to Wednesday’s session highs, 30-year yields were nearly 30bps lower.
The move could be faded, perhaps even by the time you read these lines, but as it stood in the wake of Thursday’s US macro data, the two-day rally was larger than that seen early last month.
Here are this week’s bond bullish events, through Thursday:
- ADP miss
- ISM miss
- Smaller-than-expected bumps to 10- and 30-year sales in the refunding announcement
- Fading odds of another Fed hike
- Better-than-expected Q3 productivity data and a surprise drop in unit labor costs
- Slightly higher jobless claims
And here are this week’s bond bearish events, again through Thursday:
- Higher-than-expected headline JOLTS print
- Hotter-than-expected Q3 ECI headline
- Record-high reads on home prices
- BoJ YCC tweak
I’m far from convinced that this duration rally is the duration rally. But, again, it certainly feels more convincing than what we saw early last month.
NFP could be make or break for Treasurys’ latest effort to recover from the worst selloff in living memory.
