Yesterday, we talked about the current week being an opportunity for bond markets to reflect on the range that's dominated most of 2014 (starting Jan 24th). The opportunity comes courtesy of a lack of actionable economic data. While Wednesday's FOMC Minutes are always a wild card, we're not there yet and movement yesterday was more purposeful than reflective. What gives?
First of all, we continue to see "in range" moves. In fact, a rally yesterday was the more boring option as weakness would have further skewed the suggested lift-off toward gradually higher rates (see that gradual lift-off in the 2nd chart below). The enjoyably bullish pace of the gains had at least something to do with the worst 2 days of losses for stocks since late January.
In fact, compared to the move in stocks, bond markets didn't have that crazy of a day. Zoom in to the moment-by-moment trading, and the stock lever is well connected (meaning stock prices are generally moving higher and lower in concert with bond yields). The top chart below shows the correlation (in that they're moving in the same direction almost always) as well as the varying magnitudes (in that they're not right on top of each other). The lower section shows the 'sideways to slightly higher' range in Treasury yields based on a linear regression (equal trading on both sides of the center line) back to the beginning of February. Yesterday's trading was the more boring eventuality because it prevents that range from getting any steeper.
All in all, it was a good first day back from NFP, but not one that challenged any ongoing themes. Given the help from stocks, it could have been stronger for bonds.
Wait a minute, that sounds sort of negative. What's up with that?
Well, yeah... Again, the range is sideways to slightly higher. To state the obvious, that will continue to be the case until it's broken. When it is, we'll consider how long it lasted and what the circumstances are that surround the breakout.
Whatever the case, it's important to keep in mind that the "nice dips" like the one seen between Thursday and yesterday have heretofore been good opportunities to lock in the bigger picture--at least going back to February. If that general wisdom changes, it would be suggested by yields breaking out the lower end of the range.
It's also important to keep in mind just how gradual things can be at times like this. The best historical analog for a bond market that had put in generational lows and that looked to be slowly climbing is 2003-2007. The slope of selling right now is very similar to the slope of selling during those years. We're nowhere near matching its duration, but if our current economy is to be able to sustain a trip to higher rates, those of us in the mortgage market can easily attest that its only hope would be to do so GRADUALLY (because--correct me if I'm wrong--it seems clear that a big rate spike would do big damage to the somewhat less-than-ironclad 'recovery').
On a final note, if you can wrap your mind around the 2003-2007 pace of weakness being the in the realm of possibility for the next several years, AND if you've seen recent press about the "Death Cross," consider the following. While shorter term charts make things like the death cross seem awesome (50 day moving average crossing a 200 day moving average results in a big move in the direction of the cross), it was the polar opposite of awesome during 2003-2007. If nothing else, the fact that two different time frames can have such vastly different results should be enough to take any magic 8-ball answer with a grain of salt.
Death Crosses, Then and NowGreen circles show recent death crosses and recent rallies while the red circles show death crosses beginning 10 years earlier with distinctly opposite results. The vertical dotted lines in the lower chart are inserted on the day the 'cross' occurs. White lines are 50-day moving averages, Teal lines are 100-day moving averages, and the Orange dreamcicles are daily 'bars' (high-low range) in 10yr yields. (Note: even though the last cross on the bottom chart looks like it might have worked out, it really didn't, because the cross occurred at the trough of a big rally with the following days leading higher in rate. A bounce back brought things relatively sideways, but certainly not epically stronger as the current death cross hype leads you to believe). Bottom line: it might happen and might not, but the death cross has nothing to do with it.
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