Having lambasted the market's abhorrent response to the worst terror attack in Britain in 12 years yesterday, Bloomberg's Richard Breslow takes aim at the flip-flopping consensus rearing its ugly head in bond land worldwide.
As he writes, it’s become very fashionable to get on the bandwagon that sovereign yields are never, or at least no time soon, going to rise.
A number of the biggest banks have joined the parade just recently. This relies largely on making the obverse of the assumptions they stated with great assurance for much of this year. It’s also borne out of impatience for this conviction view to start working already. That’s not a great investing thesis.
Contributing to this capitulation is the fact that U.S. numbers haven’t been nearly what analysts were hoping for. Even if they clearly show an economy that can’t be described as in crisis. But what isn’t accounted for in this line of reasoning is that global growth is improving further and faster than anyone factored in. It was a mistake to look at the U.S. in isolation at the beginning of the year and it’s just as questionable to do so now.
The last thing the ECB wants to do is upset the apple cart of peripheral markets, but it’s undeniable that they are beginning the process of softening up the market for an eventual change in policy.
With the numbers coming in strong and the rhetoric contemplating the when and how rather than if, every ECB event has become a major one. Whenever Mario Draghi speaks, traders will be listening on tenterhooks. After speaking in Madrid today, his next appearance will be at the post-ECB meeting briefing in two weeks. No coincidence, perhaps, that the Schatz yield is pushing year-to-date highs.
The U.S. two-year, for that matter, isn’t behaving as if last week’s Washington turmoil was a game-changer.
It’s common to point to dollar weakness and proclaim it’s a sign of a Fed that will have to climb down from its projections. Think of it instead as evidence that the rest of the world is doing relatively better. That doesn’t represent sad news and isn’t a reason to be bullish on yields.
So why haven’t yields responded? Making a flow rather than stock argument, it’s because the central banks are still buying a lot of bonds right on schedule. Are you willing to bet these amounts will hold steady or decrease over time?
People love the Plunge Protection Team conspiracy theory when looking at equities. Well that’s exactly what is happening in bonds, right out in the open.
Despite all the headlines, of late, gold is doing a whole lot of nothing. Really not suggestive of a world that expects, at least at the moment, yields to plumb April’s depths. And if they do, your stop is only a dozen or so basis points away in the tens. An interesting risk/reward.
As Breslow concludes, the best argument for buying bonds is a hedge for the long equity position you have and hate.
But while that’s legitimate portfolio theory, it may no longer fit central bank thinking. Just ask the Chinese...