Is The Treasury Squeeze Over?
The "everything rally" is back in the US.
As discussed at length in the latest weekly, the confluence of "just right" macro data (where that means soft-ish), a balanced message from Jerome Powell and, perhaps most importantly, a tacit acknowledgment from Janet Yellen's Treasury that oversupply concerns were likely behind the term premium repricing since August, kicked off a raucous cross-asset rally the likes of which investors haven't enjoyed in at least a year.
It was all about the abatement
Simple-minded thinking here:
10 year has gone from 5.0% to 4.5% (-ish), 3 mo was/is 5.3% (-ish). 3M/10Y was very inverted, then almost got flat.
Now bond bulls need it to re-invert, even more. Short end isn’t going to move any time soon.
Why should one bet on the curve returning to/near past inversion depths?
– Economy: are we still beating the “recession, imminent” drum?
– Inflation: how much future dis-inflation do we need, to bet on 4% 10Y?
– Term premium: is term premium going negative again? Uncertainty/risk to fade?
– Supply/demand: will Treasury keep trimming coupon refunding, or deficit shrink?
More simple-minded thinking:
Bond/stock directional correlation rather positive lately. So long as it’s +ve, adding bond exposure means increasing risk. Is this a good time to increase risk? If not, to add fixed income we have to sell equity. Which are we “better” at? Which looks more undervalued? Which has greater upside/downside?
Above is from a trading standpoint – which I assume characterizes most of the investors whipping in and out of bonds.
Different if one has a long term income strategy. In that case, how does the after-tax YTM compare to inflation? Assuming future inflation 2%, I see some bond classes with AT YTM up to 170 bp above inflation. How compelling it is to lock in a <2% real return, not sure.