US Yields Surge Amid Sharp Repricing Of Post-Election Reflation Trades

For once the shorts were right.

With the latest CFTC Commitment of Traders report showing that positions on 30Y Treasury (Ultra) futures just hitting a record short between both leveraged and speculator net positions...

... yields in both 10Y and 30Y Treasurys are surging this morning, amid a Treasury selloff that has pushed 30-year yields to the highest since August 28 and within 4bp of 200-day moving average, last exceeded in March 2019.

While corporate bond supply - and thus rate locks - is a factor, thanks to another jump in IG credit offerings including various 10- and 30-year tranches, a key driver for today's yield jump and repricing of inflation expectations appears to have come from a shift in trader attention in how markets will respond to a Biden win.

With Bloomberg writing this morning that "A Clear-Cut Biden Win Is Emerging as a Bull Case for Stocks" (which is interesting considering the immediate increase in corproate taxes, and a likely second shutdown of the US economy to contain covid as "respected scientists" advise Biden to do), it is largely referring to a note by JPM's chief equity strategist Mislav Matejka, who writes overnight that a a "potential Biden victory would in our view end up a positive for the market, with likely better trading thereafter", and would trigger the start of a rotation toward value stocks and away from growth.

The JPM strategist, eager to make both a Trump and Biden victory as bullish as possible for stocks, writes that "A potential Biden victory is unlikely to deliver significant tax increases, with these likely to be watered down, and additionally there could be a greater stimulus focus and consumer support."

"We need to get through U.S. elections event-risk first, but there could be a broadening in styles and in regional performances thereafter,” said JPMorgan strategists led by Mislav Matejka in a note on Monday. "A potential Biden victory should not be seen as a negative for markets, and could in fact lead to an internal rotation."

The JPM analyst, who has preferred growth stocks for months (clearly disagreeing with his quant colleague Marko Kolanovic who in turn has been pushing for value stocks since the summer of 2019) and correctly so considering the record underperformance of global value stocks vs growth...

... said that he is "warming" to a possible switch after the U.S. vote, where JPM sees Biden defeating Trump, and furthermore add that the chances of a clear election result are rising. Biden’s possible victory is often associated with concerns over higher corporate taxes, however, the strategists say that in light of the economic slowdown he’s likely to instead prioritize business recovery and jobs growth.

They point out that value, or cheaper equities, have “dramatically” underperformed companies with stronger earnings growth in recent months, while European stocks “have gone nowhere” for four months.

As Bloomberg notes, Matejka’s team has long favored positions in such defensive (i.e., deflationary) and growth sectors as healthcare, tech, staples and utilities at the expense of financials, consumer discretionary and energy, but is now considering a change after the election. In addition to increased political clarity after the Nov. 3 vote, the strategists cite such factors as an increasingly reflationary environment, possible additional stimulus and positive news on the Covid-19 front.

Meanwhile, while the short-end is far calmer, the Eurodollar strip is also steeper with front-month contracts supported following a 1.3bp drop in three-month dollar Libor, with Bloomberg also noting that recently popular EDZ0/EDH2 and EDZ1/EDH2 spread trades remained active during U.S. morning.