By Kevin Muir
It’s now cool to be bearish bonds. A couple of years ago you were labeled a pariah for even suggesting inflation might pick up. The few of us that argued locking in 10-year money at 1.4% wasn’t a good risk reward supposedly didn’t understand the overwhelming three Ds – debt, demographics and deflation. Yeah, ok…
However, given the recent bond bear market, nowadays the tide has turned to the point where anyone suggesting we might see a bounce in bonds is equally chastised for not fully grasping the atrocious fundamentals surrounding the US debt market.
Here is a great chart I lifted from a Bloomberg article titled “Corporate Bonds Sink Fast in One of Worst Tumbles Since 2000 by Cecile Gutscher that shows the rolling 100-day return of the JPMorgan bond index.
Funny how prices make opinions and not the other way round.
Continue reading No Nuance in the Bond Market
By Kevin Muir
This afternoon some big shooter put on a monster U.S. steepening / German flattening bond trade. The specifics of the trade were;
- buy 100,174 US five-year treasury futures
- sell 63,887 US ten-year treasury futures
- sell 65,362 German bobl futures (5-year)
- buy 29,145 German bund futures (10-year)
I did get a few pings asking if I was busy writing some tickets, but alas, the ‘Tourist’s positions have a lot less digits. According to Bloomberg, this position has $4.7 million of DV01 risk (dollar-value per basis point). That’s way above my pay grade, but it’s worth thinking about the rationale behind this whale’s trade.
Let’s break the trade into two parts. The first is the US side. The trader bought the five-year US treasury future and sold the ten-year US treasury future. This half of the trade will profit if the U.S. treasury yield curve steepens between the 5 and 10 year portion of the curve.
Continue reading Shooter McGavin, Bond Trader Extraordinaire
Yields are up, bonds down again pre-US open, per Investing.com’s graphic…
This goes in line with inflationary signaling on the macro. Yesterday was an impulsive one for the ‘inflation trade’ (IT). Since the previous intermediate trend had been up before the recent consolidation in yields (bounce in bonds as fear struck the macro) continued strength from here would indicate a resumption of that rising trend in long-term yields. Here are daily, weekly and monthly views of the all-important 10yr & 30yr US Treasury yield.
Continue reading Yields, Inflation Trade and the Ongoing Boom
By Callum Thomas
Since the September low point last year US 10-Year bond yields have risen 90bps, this compares to 125bps from the low point in July 2016 through to March 2017, or if you count it as one big move they’ve gone up 158bps. What ever way you put it the move in bonds has been substantial, so a logical question to ask is “have bond yields gone too far too fast?”
I talked about the tactical outlook bond yields a couple of weeks ago in the Weekly Macro Themes report, and a key chart from that was the one below – bond market sentiment.
The chart shows our composite treasuries sentiment index. The index derives signals from bond market implied volatility, bond fund flows, speculative futures positioning, and sovereign bond market breadth. The combined signal has provided some truly insightful leads on the market, particularly when it reaches an extreme. I have lined it up with the US 10 year bond yield to give an intuitive display of the swings in investor sentiment.
When it comes to sentiment indicators and incorporating them into a broader process, my view is that sentiment indicators typically contain ‘momentum information’ through the range, and ‘contrarian information’ at extremes. Thus I would say at this point we are swiftly transitioning from momentum to contrarian information, and the risk of a stabilization or pullback in yields is elevated at this point.
My medium term view remains that bond yields go higher. This view is informed by bond valuations still being at expensive levels, a positive growth/inflation outlook (strong cyclical picture), and a turning of the tides in monetary policy (specifically, with quantitative easing being gradually phased out globally and the Fed starting QT). Short-term, seasonality is also consistent with higher bond yields (through until about May-June).
So if I had to guess, I would say there is a decent risk of a short-term pull back in bond yields (i.e. rebound in bond prices), but that this will be a brief interlude as the medium-term trend will likely resume shortly thereafter.