The November bond rally accelerated meaningfully on Tuesday in the wake of a cool US CPI report.

The data, which included a seventh consecutive decline in the 12-month rate of core price growth (to a 25-month low), was likely to embolden dovish Fed wagers as well as duration bulls.

The rates rally ignited by the CPI update found three-, five- and seven-year yields more than 20bps lower. 10-year yields were as low as 4.43% at one juncture.

Not to put too fine a point on it, but this is precisely the move I endeavored (without a lot of success) to warn readers about last month. While editorializing around what was quite obviously a false dawn for bond bulls at the beginning of October, I said repeatedly that although the drop in yields which accompanied the onset of full-on hostilities between Israel and Hamas would probably prove fleeting, it wouldn’t be long before bonds rallied in earnest. That contention was based on three things:

1. It was difficult to discern what part of that fleeting rally was down to a safe-haven bid and what part was attributable to contemporaneous Fedspeak which indicated the Committee might be inclined to view the rise in long-end yields as a substitute for the final rate hike tipped by the September dot plot. That incremental dovish inclination amid an otherwise hawkish narrative plainly telegraphed that the dots might’ve been stale within two weeks of their release thanks to the ferocity of the long-end selloff. So, even if the haven bid for bonds fizzled out, the Fed was opening the door (inadvertently or not) to a bond rally on the first sign of softer data.
2. Commentary from Janet Yellen (and Lael Brainard) suggested the administration was apprised of the extent to which the term premium repricing was not a drill, so to speak. That had implications for the refunding announcement.
3. Extreme moves are almost always good candidates to fade, and the move in long-end US yields was extreme.

At one point last month, when I gently suggested for the umpteenth time that duration was a falling knife worth catching, one reader exhorted me to “Move on!” I was wrong, he insisted, and I should give it up.

I’m not sure what that readers’ investment horizon is, but it apparently can’t be measured in months, and perhaps not even in weeks. I might’ve been “wrong” for a few days, but from the intraday highs seen just two weeks ago to Tuesday’s lows, 10-year US yields were down nearly 60bps.

If you’re wondering whether this was something so-called “pedestrians” were capable of benefiting from, the answer is plainly yes. Thanks to the “magic” of ETFs (and long-time readers are familiar with my reservations regarding the ETF-ification of every asset class known to man) any idiot could’ve made a little money on this (almost preordained) rally. The largest Treasury ETF, for example, was +10% from the October 23 lows to Tuesday morning’s highs. That product has seen a veritable tsunami of inflows in 2023.

But the point isn’t about any trade. The point, rather, is that we’re now at a crossroads of sorts. With 10-year yields below 4.50%, it’s tempting to suggest that until there’s additional evidence of a meaningful macro deterioration in the US, longer-end yields are at the bottom of a range-trade. Most of the structural factors bears cite in making the case for higher yields are unchanged, and until further notice, there’s scant evidence that the world’s largest economy is on the brink of the “Wile E. Coyote moment” some have been hinting at for the better part of a year. Further, it’s tempting to suggest the bull steepener may be more likely than any extension of the bull flattener (the 5s30s stood out following CPI), but with Tuesday’s rally, twos were already almost 50bps below EFFR.

In any case, with inflation now apparently on track to trundle towards target in 2024 and with the odds of softer (if not necessarily recessionary) data seemingly increasing, it’s quite likely the Fed will have plausible deniability to take rates lower next year than tipped by the September dot plot. Remember: The 50bps of cuts telegraphed by the last SEP was measured from a higher terminal rate which apparently isn’t going to be achieved anymore. While serious people can debate the merits of the logic that says lower realized inflation outcomes necessitate immediate rate cuts to avoid mechanical, incremental tightening via higher real rates, clinging to a 5% policy rate for the sake of it may not be a tenable position during an election year where job losses could increase the odds of what I think it’s entirely fair to say would be an undesirable election outcome in the eyes of most Fed governors, regardless of party affiliation.