Bonds remain in the midst of a very large and sustained sell-off. Generally speaking, the rising rate environment is a logical byproduct of pandemic progress with acceleration on both fronts beginning in February (i.e. faster yield spikes = faster vaccinations and faster decline in case counts). Combine that with the fact that the US is very much leading the way out of the pandemic in economic terms and it’s no surprise to see some traders citing Biden’s spending/vaccine announcement yesterday as stirring up another round of generalized selling pressure at home and abroad.
That’s not to say this is the only reason bonds continue to suffer. After all, we would already assume vaccine infrastructure is going to move as fast as it can (with little additional benefit from improvements in political support). And while it’s always more satisfying to find obvious, individual market movers in the short-term, a vast majority of 2021’s losses simply can’t be tied to anything other than the big picture and general momentum.
This week is quickly reinforcing that message–especially for market participants who thought they were on the cutting edge of the market mover detective work. Specifically, recall last week’s discussions about portfolio rebalancing where several big bank analysts pointed out that the Q1 bond market rout and stock rally indicated a massive amount of pent-up bond buying demand–purchases that would need to be made before the end of the month. This seemed like a great opportunity to look for some support this week and actually be able to connect it to a near-term event.
Bottom line: the “rebalancing” analysis hit the street on Thursday last week. It clearly suggested better buying demand for bonds and bonds have been selling steadily since Thursday! In defense of the analysis in question, it did point out that a portion of that buying demand may have already shown up by the time of publication. If that’s the case, then the rebalancing narrative would actually be BAD for bonds. Why? Because the best it could muster was a half-hearted attack on the 1.62% floor before giving way to the highest yields in more than a year just a few days later.
How about oil prices? Lots of buzz there recently. Is there something going on with the no-longer-stuck boat and oil that’s causing bond volatility?
Nope. The boat’s un-stuck. Oil prices fell. Everyone who’s been telling me about oil and bonds would assume that would be good for yields. It wasn’t. There was FAR more correlation with the opening trades in the European bond market overnight. Oil’s correlation with the bond market is primarily driven by their complementary nature and shared motivations (i.e. stronger economy = higher yields and more demand for oil).
The yield spike means we continue to explore “the hitch” zone that I introduced on February 19th (when yields topped out at 1.36). This is the range of yields where we have our best chance of seeing at least some attempt to end the prevailing uptrend in rates, even if only temporarily (weeks on the short end and months on the long end). We’re now more than halfway to the top.
As a reminder, the hitch is just a fractal of the only other market event in the past few decades that came anywhere close to the pandemic reaction (i.e. the financial crisis rally in 07-08, and the big bounce in yields in 2009/10).
If you’re eyeing the chart above, thinking the 2009 bounce back looks a bit bigger than the current version, you’d be right. Based on the ground covered back then, the current ceiling could be as high as 2.4%. That’s actually entirely possible and could even be a bit low in some scenarios, but again, we’re just looking for some time and space for yields to cool off before the next bout of momentum–more “looking” and less “finding” for now though…