For days–and especially since last Friday–we’ve been increasingly worried that the 2-month bond rally was running out of steam and at risk of a reversal. The jury was technically out until all of our overhead ceilings were taken out. As of this morning, they are. The following chart has the exact same trendlines that I’ve been posting for weeks although I added a new horizontal level (actually an old one) at .64% and another blast from the past at .69%. These are the next 2 stops on the pain wagon should it continue to roll.
But why is it rolling in the first place? Are bonds freaking out because of the overnight approval of a Russian covid vaccine? That’s certainly the narrative, and it would be very easy to blame the vaccine and move on. But consider a few things before jumping on that bandwagon.
First, we often talk about monthly themes in bond market movement. July was clearly one kind of month (pervasive rally to the best-ever levels) and August has been a very different month right from the outset. 4 out of the past 6 days have been losers, ultimately bringing yields to the brink of a breakout yesterday.
Secondly, I’ll go right back to the point about being on the verge of a technical breakout. I’ve been warning you about this for days (with words like “rally running out of steam” and “Bonds Sending Same Old Warning.” Now that the technical breakout is here, we can really pick any piece of overnight news to blame and it’s going to look like a hero. But the fact it we could very easily be seeing the same exact move with no Russian vaccine.
Third, fourth, etc… SUPPLY! This isn’t a new word if you’ve read my stuff over the past few days. There’s a deluge of Treasury supply starting today. While it’s not a surprise to bond traders, the logistics of moving mountains (see the analogy here) can still pose problems. Slightly more of a surprise is the extent to which corporate bond issuance scene has ramped up. Finally, stimulus negotiations keep the promise of YET MORE SUPPLY in clear focus (stimulus will be paid for with Treasury issuance).
Lastly, for those that really want to believe the conspiracy or who just can’t accept that bonds aren’t selling because of a Russian vaccine, I will give you a plausible way to believe that–one that may even deserve a spot in the list of market movers. There is no doubt that the Russian vaccine was rushed to market in a way that the medical systems of other countries deem irresponsible and potentially dangerous. Nonetheless, there’s no doubt that lots of people will take this vaccine outside of Russia. In that sense, it serves the same role as any other vaccine related update. It would be the same as a major pharma company announcing a major expansion of a clinical trial for a vaccine that was successful in early trial stages. Indeed, last night’s market reaction is on par with those sorts of headlines.
Rest assured, if the world thought it had an actual, viable vaccine on August 11th, 2020, bonds would be doing a whole lot worse than they are right now. The bigger question is whether or not this is the beginning of the end of all-time low rates. That’s a question we’ve been able to ask several times on the way down, and it continues to be impossible to answer with certainty. At some point “yesterday’s” or “last week’s” or “last month’s” rates will be the lowest in history. The farther away we move from those lows, the more we’ll doubt our ability to return. When all time lows are only a few days in the past, people tend to think we’ll get back there and make new record lows. But that is never a guarantee.
Have we seen anything happen this week or today that makes us doubt rates’ ability to move back to long-term lows? No. Have we seen anything to make us fear an imminent spike? Yes, frankly we saw that last Friday and again yesterday. Will that spike be THE spike that kicks off a prolonged trend leading us back up from all-time lows? There’s no way to know that today. It depends on things that haven’t happened yet, and the Russian vaccine isn’t on that list.