How bullish do you want to be?
That’s not such a glib challenge really. I certainly know why the market’s done what it’s done; largely on the back of North Korea and hurricanes, with a peppering of economics to spice things up along with somewhat dovish aspects to recent Fedspeak, benign/neutral steadiness from the ECB and generic uncertainty from Washington. Jeez, that is a lot, isn’t it?
Still, I think there’s a dose of caution warranted. No, I’m not bearish on rates. I am respectful that we have supply next week, it’s not as if the economy is falling out of bed, and while the existential risks are there they are not new—Washington in a bizarre state with Trump at odds with everyone at one time or another. I don’t for one moment believe that his moment with Schumer and Pelosi over the debt ceiling is the start of a beautiful relationship, but rather an expression of his frustration with the very divided GOP members of Congress. The latter is the bigger deal, ultimately, especially in terms of the tax plan going forward.
Anyway, we just go a lot, which tells me why yields are here and why they could edge lower. However, these days the market is so quick to price in the headline, we’re not left with a lot more until we get something more. This is to say we just traded the Fedspeak, Beige Book, NFP, European Central Bank and, to a degree, most of the hurricanes. As I write with trembling fingers over another, bigger, North Korean bomb test, I kind of think that’s not new information. Is all this worth, say, another 5-10 bp in the coming days?
I would think that’s about right. Such a move would take 10s just under the optical resistance of 2 percent and touch the 1.99 percent level, which was the lowest yield we saw after the election on Nov. 10. Remember, Nov 9 saw a 38 bp range day, with a low of 1.71+ percent and a high at 2.08+ percent give or take. Maybe we have a chance at the midpoint at 1.90 percent (1.94 percent would be the 38.2 percent retracement of that day’s range), but I don’t think with the information we just garnered.
For some context, Daily Sentiment Indexes (DSIs) in 30s were about 20, or extremely oversold. They did fall further to be sure. Today, US DSIs are 75, so quite into overbought territory. I think it will take more than current momentum to give longer yields more than the 5-10 bp technical gain on my radar.
I do think the curve can steepen. There is that auction thing going on and still room to squeeze out a bit more of tightening that’s priced into December and Q1 (think about the new stock of people at the Fed). I haven’t thought too much about balance sheet reduction and the September 20 meeting, but then I suppose that the Fed will stick to its guns and announce the process because, why not? They’ve talked it up, the market won’t be disjointed by it (hardly) and they can ‘blame’ any pullback for hiking on the hurricanes and inflation data.
David Ader is Chief Macro Strategist for Informa Financial Intelligence.