Market Commentaries   |   June 5, 2020

Moment of Truth for Bonds? Risk on and a better future?

Today’s unemployment report has arrived at an important technical intersection of inflation expectations, rate levels, and curve slope. The stronger than expected job creation has ignited an equity rally and a bond market sell-off.  If these trends continue, the bond market is announcing today that a bear steepener is confirmed, and that inflation expectations are on the verge of making a break-out…

Technicals are nothing more than a graphical representation of supply and demand for securities, and just as investor expectations change, so do supply and demand –these charts suggest that today’s better than expected data, combined with healthy and sustained equity returns, are now being confirmed by bond market price action (supply & demand):

  1. The 10-year Treasury yield is about to break through a downtrend in place since late 2019.
  2. The slope of the yield curve 2s-30s is also breaking out to new highs.
  3. The break-even on the 10-year TIP is also on the verge of breaking out of an important technical formation.

If these trends are sustained, the bond market is saying that the Fed may own the short end of the curve, but bond market vigilantes still own the longer-end for now. These guardians of the curve are saying that Federal stimulus and the Fed’s aggressive monetary policy will likely work, the economy will likely accelerate, and inflation will likely head higher from  these levels. These bond market vigilantes are not ignorant of the crisis that faces America. Perhaps they are being optimists, that the government and the private sector will do what it takes to address America’s challenges, that a COVID Vaccine will be ready in the fall,  and that a more sustained and reflationary domestic policy program to address long standing inequities will be formulated and implemented. If that’s what the bond market vigilantes are thinking, lets hope they are right.

Figure 1: 10-Year Treasury

Bloomberg, data accessed 6/5/20

Figure 2: 2/30 Year Treasury Slope

Bloomberg, data accessed 6/5/20

Figure 3: 10 Year Breakeven TIPS

Bloomberg, data accessed 6/5/20

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