What a bore it’s been to watch yields.
10-year treasurys and 30-year treasurys remain very much in a narrow range and that red oval you see on the 10-yearr chart I drew two weeks ago! I get it, the data has been decent enough but overwhelmed, I guess, by: (1) the benign inflation data, especially on wage front; (2) data revisions offsetting headline gains or losses; (3) steady words about tightening from the Fed; (4) the addicting spectacle of Trump’s romp overseas; (5) the coverage of EM debt; (6) widening corporate spreads; and (7) hey, it’s summer. Point 7 stands out.
In any event, the largely sideways action doesn’t leave much to get excited about as such action will unwind overly bullish or bearish sentiment and resolve nothing more than further sideways range. And so, we watch and wait. The wait part is borne out by the forward-looking elements to recent surveys, like from the Empire State Index and Philadelphia Fed, which declined sharply. The trade stuff goes a long way to explaining that, which only underscores how serious the threat is to most U.S. businesses
This price action has an interesting angle to it. You can see that speculators from the CFTC’s Commitment of Traders Report have been covering a lot in the front end, which could be a case of covering shorts to book profits (nothing wrong there), as they surmise that either the market’s largely priced in the pace of Fed hikes OR they sense some change in the wind, i.e., a slower pace. I think the former is the case, frankly, and I don’t buy into the idea that people see a slower hiking trajectory. As it stands, Dec. Funds are still not fully priced to a hike that month. The point is people are covering up shorts, which is a way of saying they’re unwinding conviction.
They’re not doing this in Euro$, which challenges my narrative, but perhaps says something about their view on credit.
I think the 10-year yield chart reveals a lot about this market, i.e., the direction. When you see this sideways movement, surrounded by that oval and bordered by parallel red lines, you will get the point. To a high degree, this negates or neutralizes momentum direction as the price non-action tires them out. I can nuance the technical side to this, try to see a head-and-shoulders bullish pattern, but I think that’s overdoing it; not much is happening. Of course, the seasonals are bullish, which itself lends a small bias, but the fundamentals really hint at a flatter curve, and somewhat higher yields or so I’d argue (or hope). I think 10s can test 2.95 percent and still be considered in a range.
The weekly chart of 10s is more bullish with a channel break and momentum falling in line with the longer-term price action this year. The channel’s objective is about 2.70 percent currently—very much in sync with the 2.69 percent 200-day MA and, get this, the 2.71 percent 200-week moving average. But, the channel mentioned is rising (see chart) and simple sideways grinding through September will lift that closer to current levels. Lending the bullish hand to my view is that I can’t imagine two months of this sort of activity, especially if the odds are nearly full for a September hike. Then again, I could argue 10s do just that, grind nowhere, because I expect a hike. That is to say, they hold in and outperform the front end.
The curve looks too flat for a trade and only a trade. That dovetails with the view that the next hike is fully priced in and so leaves little room for more flattening on that front, plus momentum measures are well oversold. Speaking of myopic, I liked 3s vs. 2s and 5s for a 3 basis point outperformance based on momentum and nothing more than that. I think 10s can steepen 3 bps or so vs. 30s.
These are minor ideas, tactical, and as much to keep engaged as to get rich on. Take it for what it’s worth.