The strong bid in bonds continued today after a brief respite on Monday.
Many market participants are asking what is behind the buying in fixed income. One theory is that the bond market saw through the latest non-farm payrolls report and instead is viewing the cracks in things like the household survey or the S&P Global US PMI. There's a healthy debate right now on whether growth or inflation is the bigger risk next year and bonds are saying the inflation has peaked and growth is vulnerable.
I think some of the driver is also oil and relief on diesel prices. WTI crude oil peaked at $130 in March of this year and when the year-over-year comps hit in a few months (assuming a flat price) oil will be down 44% y/y. That's a powerful drag on the CPI and will bring it back to 2% faster than the Fed had anticipated.
So the bond market is signaling both a top in inflation and an economic slowdown. Given those risks, the hurried flight to safety makes sense.
Technically, there isn't much support on the yield chart until 3% though bonds are suddenly overbought and that could prompt a bounce if PPI or CPI is hot.
I also worry that we end up with a whipsaw. Housing could be a good example with US 30-year fixed mortgages quickly approaching 6%. That could reinvigorate the home-buying market and kick off more activity then the Fed was anticipating, ultimately resulting in tightening later. Given commodity-inflation dynamics and y/y factors I think that's probably a trade for the second half of 2023 though.
US 10-year yields were last at 3.42%, down 9 bps on the day.