When much of the sellside was giddy in anticipation of a breakout of 10Y yields above 2%, we said on November 9 that the selling in bonds - which was largely at the hands of CTAs - was over, as was the market's "great" defensive/momentum into cyclical/value rotation.
So far, we were spot on on both accounts, with the Nov 8 10Y-Treasury yield high marking the recent top, and transforming into a nearly 30bps drop since...
... while the much anticipation value resurgence suffered a crushing blow, down 9 of the past 10 days.
So was that it for Wall Street's hopes for a great economic renaissance which would send 10Y yields to 2% and higher (according to Marko Kolanovic as much as 150bps higher)? According to the rates team at BMO Capital Markets the answer is a resounding yes.
As BMO's Ian Lyngen writes this morning, "in the week ahead, holiday preparations will overshadow the condensed data calendar and those anticipating a paradigm-shifting breakout in Treasuries will find their dreams shattered like cybertruck windows. [That quip simply had to be made.]"
So what are the reasons for Lyngen's bullish take on TSYs? As he first notes, "the market is doing nothing wrong from a technical perspective as the process of consolidation persists; certainly not an exciting development, but the absence of any details related to monetary policy, the trade negotiations, or the global outlook leaves a sideways grind as the path of least resistance."
That said, within the confines of the trading range, "there remains a compelling argument that 10-year yields will stage another attempt to breach the 1.97% recent peak." Nonetheless, as he then points out, "any foray into the land of 2-handle 10s will be a short-lived venture as dip-buying is an omnipresent theme which promises to be with us for the foreseeable future."
As a key runner-up reason that has served to cement the upper-bound of the Treasury range, Lyngen cites the performance of the 2s/10s curve whose dynamic is similar to the one unfolding in outright yield levels. Specifically, the upward-sloping channel which has been in place since mid-September has broken and the implications point to a continued flattening.
And while stochastics are skewed toward a retest of the 14.4 bp low mark from late-October - which is precisely where the 2s10s is trading right now - given that oversold/flat conditions will soon be a reality, Lyngen is far less compelled to go with the present move and "with 10s and 30s, the next few trading sessions will reveal precisely where resistance lies across the primary benchmarks; our assumption is that said levels have already been set (1.705% 10s, 2.174% 30s, and 14.4 bp 2s/10s)."
Which is not to suggest that all incoming data will dismissed in its entirety; after all, the consumer confidence and personal
consumption reports will further refine Q4 growth expectations. Meanwhile, as we reported last Friday, both GDPNow and Nowcast are tracking at just +0.4% for the current quarter.
Here the BMO strategist points out what may be the biggest threat to continued selling in Treasurys: the willingness and ability of the consumer to continue propping up the US economy will be put to the test over the next six weeks.
The time-tested adage ‘never bet against the US consumer’ comes to mind; particularly as the labor market remains tight and real wage growth is positive.
To be sure, 2020 promises to be a defining one on a verity of levels, "and the political implications of holiday spending or frugality are not lost on the BMO rates expert, who notes that "incumbents don’t get reelected during a recession."
As such, just how Trump will tread the needle between a recession and a burst higher in yields, which as Nordea noted previously threatens the market rally...
... will be the defining feature of where rates go from here, assuming of course that fundamentals matter more than positioning, which is simply the answer to the question what do CTAs do next.