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US 30 year bonds
US 30-year bonds have had a worrisome week.
They’ve risen for five straight days in a climb to 4.61% from 4.31% and that’s coming at the same time as Chinese debt heads in the other direction. Now some of that could be seasonal quirks and we’re still within the post-election range.
I worry about that range though. It’s a narrow spot on the chart and we will need to go down and test 4% or 5% at some point, maybe more.
I would like to think that will depend on how the economy evolves but I fear that it may hinge more on Washington and what Congress decides to do early in Trump’s term. There is one line of thinking that the border/immigration and energy will be the first priority with taxes left for later. There is another that aims to extend Trump’s tax cuts right away.
Politically, I have no idea how that shakes out with the narrow Republican majority but I don’t think fiscal hawks are in a position to put up a fight at the moment. That may mean it’s the market that kicks and screams.
Now it could also come down to the economy. There is deep uncertainty about the animal spirits that could be unleashed following the election. Many business surveys lamented Biden and pinned for a new administration and said they were holding back investment and hiring until the election. If that’s the case, the US growth could surprise next year, even without Congressional help.
In any case, the US dollar will be along for the ride. Japan isn’t signalling a rate hike next week and the marekt has it priced at just 23%. With that, USD/JPY is climbing again, up 107 pips to 153.70 today and on a five-day winning streak that mirrors Treasury yields.
More broadly, the quiet period in bonds has contributed to the euphoric mood in stocks. If the range in yields cracks to the upside, it might not be pretty.
What to watch for next? I don’t think a dovish Powell on Wednesday would be well-received by the bond market. Yes, it would push down short-dated yields but 30-year yields are likely to push higher as the market senses too much loosening at an uncertain time.