Bonds have very nearly pulled even for 2024. Maybe you noticed.
10-year US yields were as high as 4.70% in late April. They’re 4.23% now. That’s a nice rally. What happens next is an open question.
On one hand, the US economy’s finally slowing. Or at least it looks that way. And the Fed’s likely to cut twice this year, the June dot plot aside.
On the other hand, nobody’s addressed the fundamental concerns which drove long-end US yields dramatically higher late last summer. Among those factors: Fiscal excess — profligacy, or the perception thereof.
The figure below shows the share of panelists in BofA’s Global Fund Manager survey who say fiscal policy’s too loose.
Never before have fund managers been this convinced that fiscal policy’s “too stimulative.”
As it happens, perceptions of fiscal excess are actually a contrarian indicator. Or at least they were following two of the previous three peaks.
The table below shows benchmark US treasury returns following the peak in fiscal excess perceptions from the BofA FMS.
“In November 2021 [the peak] was followed by mass inflation and big bond losses, but in May 2011 and November 2018, the end of ‘fiscal excess’ was followed by big bond gains,” the bank’s Michael Hartnett noted. 2024, he went on, is “following that script.”
Again, bonds have found their footing of late, and notwithstanding last month’s exuberant NFP headline and an upbeat read on S&P Global’s services PMI for June, the data points to a slowdown (and cooler inflation if you believe the last two CPI reports).
Still, asset allocators have “little conviction” in being long the long bond, Hartnett said, adding that although “many acknowledge a slowdown in the US economy, [the] big pushback on buying the 30-year [is] US debt, deficits and politics.”
There’s also the question of the neutral rate. Market pricing suggests it’s 85bps higher than the long run Fed marker, and that’s after the neutral dot moved up 30bps and after five-year, five-year forwards came in 90bps from last year’s highs.
One of Hartnett’s “zeitgeist” quotables in his latest weekly read: “My biggest worry is a sweep in the US election and a Liz Truss moment.”
