US 30-year yields fall below 2%
What's spooky about the chart of 30-year yields is how it mirrors the pre-pandemic top and decline. There was a failure to make a new high followed by a long slide that eventually crumbled. If the pattern repeats, we're about to see a washout.
My problem with the comparison is that the fall in yields in Jan-Feb 2020 was all about covid circulating in China. There was a clear catalyst and the bond market did a great job of sniffing it out. What's the catalyst now? The delta variant? I think that's a risk but I tend to think it's well understood.
Here's what BMO says on the bid in bonds:
There are two core tenets we'll note behind the ongoing bid for Treasuries: first, the upside currently underway in the US economy is only temporary, resulting from the massive stimulus in the system and a variety of pandemic distortions - the assumption being potential growth and r-star have been unchanged by the events of the last two years. Second, the supply-driven inflationary pressures will initially function as a tax on consumption at best and/or eventually lead the Fed into action before it's time - resulting in an interrupted recovery.
Ultimately though, someone has to buy bonds paying just 2%. Of course, that level might not seem so bad in a global context of German 30s paying just 0.226%. If you have to park your money somewhere safe, it might as well be in the US. That thinking helps to explain the bid in the US but it also argues that it's only temporary, particularly compared to Australia, where you can get 2.19% for 30 years.
Tomorrow's Fed minutes will also be notable because the market is struggling to understand just how serious the Fed is about tightening. The dots sent one message but the minutes are likely to temper it.
Here's BMO again:
The reaction-function of the FOMC to higher realized inflation will be in focus tomorrow with the release of the meeting minutes from June 15-16. Investors' current assumption is that the increase in the 2023 fund projections illustrated the wide error bands of forecasting monetary policy so far into the future as well as the divergence of opinions between certain regional Fed presidents (and their research staff) and the core decision makers on the Committee. The last two weeks of Fed speak certainly conforms with the adage 'every hawk has its say' - even if history has shown this doesn't necessarily translate into monetary policy. Nonetheless, it is just as difficult for central bankers to ignore the upward pressure inflation as it is for investors and consumers. The biggest unknown as it relates to upswings in CPI/PCE is whether the trend ultimately drives wage gains to a higher plateau.
What's so strange is that all the commentary is still about inflation, even with the bond market saying the opposite.
