Pull back only
The start of the second half of the year was met with a sharp move lower in US 10 year bonds. Why? The answer is far from obvious? Was the market returning to buying US 10 year on US labour concerns? Was it worries over the spread of the COVID-19 virus? Lack of confidence in the Fed in that they are exiting their policy too early? Or was is it simply a rotation out of stocks into bonds with stocks having had a great first half of the year. All of these make sense in isolation, but the conviction to highlight any was low.
Big picture remains the same
In short nothing was really going on in the bond market that changes the big picture. The big picture is that the US is moving towards normalisation and, with all things being equal, it is going to get there. A recent Reuters poll in June sowed that bond trades expect US 10's at 2.0% (currently under 1.50%). What we saw to start the second half of the year was a pullback. The core view of higher yields makes sense by year end.
The lesson is to keep the big picture in view when we have relatively minor, and unclear market moves. That can be easier said than done in the stress and drama of market action (especially when leveraged, of course).
