Stocks are a bit of a sideshow right now. It’s all about bonds.

Indeed, equities are beholden. “Treasurys were definitely the driver and the S&P 500 was the passenger that just went along for the ride,” JonesTrading’s Mike O’Rourke wrote, of last week’s price action.

The sharp bond rally that began with Treasury’s refunding announcement and continued unabated through payrolls helped US stocks post their best week in a year.

The last comparable weekly rally for US equities was likewise catalyzed by a big drop in yields: That accompanying the October 2022 CPI report released a year ago this Friday. 10-year yields fell 35bps that week. They fell 27bps last week.

As the figure above shows, the only weekly 10-year rally in excess of 10bps (let alone 20bps) that wasn’t accompanied by stock gains was that seen around SVB’s collapse.

Suffice to say a lot hangs on whether the nascent bond rebound is sustainable. This week’s auctions are key, and CPI later this month will be decisive, particularly as it could take another rate hike off the table once and for all.

“Bond and stock investors were positioned for 5.5% 30-year Treasury yields, not 4.5%,” BofA’s Michael Hartnett remarked, capturing, in one sentence, what happened last week, when the “everything rally” made a triumphant return.

It was just a week ago when Nomura’s Charlie McElligott laid out the case for a Santa melt-up in equities. “A beta rally into year-end” would be the “pain trade” following meaningful exposure reductions across investor cohorts, Charlie said. “Because nobody has enough net on.” He suggested December SPX 105% calls, citing the potential for stabilization at the long-end of the Treasury curve.

As it happens, the long-end not only stabilized, it rallied sharply. We got the move McElligott was looking for, and “it only took an absurd four days!” he exclaimed, in his latest.

In the three months to last Monday, asset managers cut equity positioning by more than $60 billion, while vol control de-allocated to the tune of $54 billion and CTAs sold more than $21 billion over the same period, on Nomura’s estimates. I highlighted those figures early last week. That was the positioning backdrop against which e-minis ripped 6% from the lows.

So, is that it? Or can it run further? Well, again, a lot depends on rates. But McElligott reiterated that the “flow shift” catalysts detailed here last Monday still have the potential to “perpetuate an upside move further.” Do note: It’s not guaranteed. Charlie often reverse-engineers rallies and selloffs in advance. So, he endeavors to describe the sequencing behind what could happen.

In that regard, additional gains for equities which prompted more “downside hedge bleed” would lead to large delta-to-buy and a reset lower for both vol and vol-of-vol, which could then “spin into systematic and active / discretionary reallocation,” McElligott wrote. That would play out against the resumption of the corporate bid as the C-suite exits buyback blackouts.

Don’t forget: Year-end is approaching. That matters. “Part of the discussion as to whether this ‘everything rally’ can sustain comes down to whether or not traders have the PNL to get constructive and still take some shots into a calendar that is closing fast,” Charlie added.

The same is true of anyone looking to exploit the move on the other side. Leveraged funds and the macro crowd would need to have some spare PNL if they wanted to “fade an overshoot in the trade and play for a range-y resumption of the selloff or a re-steepening [in the curve] in the weeks ahead,” McElligott wrote.