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"Bond Bears Have Had Their Fun": Why One Trader Expects A Sharp Move Lower In Yields Next

Having correctly predicted the dovish relent by the ECB's QE taper announcement last week, whose explicit "open-endedness" appeared to surprise many of his hawkish Wall Street colleagues, overnight Bloomberg macro commentators Mark Cudmore looked at bond yields and concluded that "bond bears have had their fun", as "almost all upcoming risk events are skewed to drive 10-year Treasury yields lower rather than higher."

Among the key catalysts cited include the Fed's next chair, where the "dovish option", Powell appears to be a shoo-in, while tax reform is starting to once again look shaky: "The main reason 10-year yields aren’t already lower is due to optimism that a viable House tax bill will be released this week. “Optimism” and “viable” being the key words in that sentence." According to Cudmore, "while we may see a tax plan this week, we’re still a very long way from having stimulative tax cuts passed, let alone flow into the economy. With optimism riding so high, disappointment seems more likely than a positive surprise."

Then there is the "known unknown" of geopolitics: "we also have the real and imminent possibility of a renewed haven bid for Treasuries. Not only is there uncertainty about the Russia probe, with speculation that the first arrests could come as soon as Monday, but Trump is about to jet off to Asia, where he’ll have plenty of opportunities to riff on his pet topics of unfair trade and North Korea’s nukes."

That said, Cudmore is confident one can ignore technicals at this point where much of the upside has already been priced in:

Economic data can provide some noise and volatility in both directions this week, but barring a major shock, the readings will be subsumed by other news.

As for technicals, he writes that "there was a bizarre amount of excitement around the 2.4% level in 10-year yields, thanks mainly to some prominent fund managers. But we were above that arbitrary level several days in May and for most of December through March." And while he concedes that he is no technician "it seems that most fundamental catalysts are lined up to knock 10-year Treasury yields substantially lower."

In concludion, "bond bears have had their fun. Almost all upcoming risk events are skewed to drive 10-year Treasury yields lower rather than higher."

Judging by the recent move, and change in momentum, Cudmore may be right.

Full Macro View note below:

Everything Set for Treasury Yields to Slump: Macro View

 

Bond bears have had their fun. Almost all upcoming risk events are skewed to drive 10-year Treasury yields lower rather than higher. 

 

Whoever Trump nominates to be Fed chair, the decision is unlikely to support 10-year yields that have erroneously shifted higher on speculation John Taylor might be the pick. The two favorites, once again, are Powell and Yellen, who are perceived as dovish.

 

Even if Taylor is victorious, any headline jump in long-end yields won’t sustain. The fact that he’s seen as hawkish will prompt the curve to flatten sharply as premature hikes become feared. So the short-end may rise, but 10-year yields are likely to fall further under Taylor than anyone else.

 

The Fed will always retain optionality, and won’t guarantee a December interest rate hike this week. With such a move more than 85% priced in by rates markets, if there’s to be any surprise out of the FOMC meeting, it can only be dovish.

 

The main reason 10-year yields aren’t already lower is due to optimism that a viable House tax bill will be released this week. “Optimism” and “viable” being the key words in that sentence.

While we may see a tax plan this week, we’re still a very long way from having stimulative tax cuts passed, let alone flow into the economy. With optimism riding so high, disappointment seems more likely than a positive surprise.

 

Separately, we also have the real and imminent possibility of a renewed haven bid for Treasuries. Not only is there uncertainty about the Russia probe, with speculation that the first arrests could come as soon as Monday, but Trump is about to jet off to Asia, where he’ll have plenty of opportunities to riff on his pet topics of unfair trade and North Korea’s nukes.

 

Economic data can provide some noise and volatility in both directions this week, but barring a major shock, the readings will be subsumed by other news.

 

There was a bizarre amount of excitement around the 2.4% level in 10-year yields, thanks mainly to some prominent fund managers. But we were above that arbitrary level several days in May and for most of December through March.

 

I’m no technician but it seems that most fundamental catalysts are lined up to knock 10-year Treasury yields substantially lower.