Monday, June 3, 2019

Strong bond rally but we have seen larger in last decade - Largest since Fed tightening


The current bond rally is strong. Investors are discounting a global slowdown and further trade wars that will trade. There is no question bond investors have turned pessimistic and there is a growing flight to quality, but this move should to be placed in historic perspective. We have seen larger one month and three month moves in terms of basis point declines and we have seen greater percentage declines in yields. Two-year yields changes are less volatile than during the transition between quantitative easings. The 10-year yields have exploded to the downside earlier in this cycle only to reverse direction. This is the largest bond rally since the Fed switched to tightening.

The declines in PMI during 2012-2013 were more dramatic than the current decline, but we do not know whether this economic decline will continue. We could be in the middle of a further PMI fall, so we can easily see further yield falls. 

The market pressure on longer yields places more pressure on the Fed to act given the potential for further inversion. Two cuts are being priced in this year. Whether holding cash in an inversion or playing for a further bond rally, there is a strong case for further switching from risky to safer assets. Even if you are uncertain about economic direction, cash is attractive and safe. 

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