Head of Fixed Income Strategy
Summary: There is potential for rates to fall before they resume their rise later in autumn. Ten-year yields rose this week in the wake of the Jackson Hole Symposium, but a death cross is about to form. In technical analysis, a death cross sends a strong bearish message which could anticipate rates falling; thus US Treasuries rising. If that were the case, the bond bull market has the potential to continue until September's FOMC meeting. However, in autumn, we'll see a strong reversal as tapering becomes necessarily more aggressive.
The Bond market is signalling that Jackson Hole may be a "buy the rumour, sell the fact" kind of event. Indeed 10-year, US Treasury yields rose roughly 9bps since the beginning of the week. Still, we see a death cross forming with the 50 days Moving Average (MA) about to fall below the 200 days MA.
A death cross is usually a strong bearish sign, which in this case could drive yields lower, thus the value of US Treasuries higher. It goes hand in hand with what we have identified earlier this week in our "Fixed income market: the week ahead": the massive liquidity in money markets can still compress rates in the short term. Indeed, the Reverse Repurchase (RRP) facility continues to receive record-high volumes in demand daily, showing there is too much cash chasing fewer assets.
We believe that before 10-year yields resume their rise in the fall, they can test support again at 1.12%. In the most bearish scenario, yields could fall as low as 1%. However, the bond bear market will be back in October/November when it becomes evident that inflation remains high and a more aggressive tapering is needed.
Therefore, it may be too early to short TLT and IEF. We need a strong hawkish surprise at today’s Powell’s speech and Jackson Hole symposium to see rate resume their rise. However, that hawkish sign that bears (including myself) are expecting might not arrive until the September FOMC meeting.
Suppose you are looking to trade the Jackson Hole event today. In that case, it may be useful to know that the monthly standard deviation for 10-year yields is 6bps. However, yields have been quite volatile this year. There have been instances where we have seen the 10-year rise as much as 15bps at the end of February as the reflation trade unfolded. Therefore, it can be safe to say that a strong market reaction would see yields moving 5bps upwards or downwards, but we need a surprise to see yields moving more than that.
We remain of the opinion that there is a low probability for a hawkish Powell today as there is still a lot of focus on Delta (the conference is going to be held online), and labor market is not where the Fed wants it to be.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
