The old adage is that magazine covers are a jinx. That’s particularly true with The Economist but Barron’s has had some doozies, including making the case for Pfizer earlier this year (it’s down 40% since).
The cover this week certainly raised alarm bells but it may prove to be one of the better-timed calls in the magazine’s history.
US 10-year yields are down to 4.56% from a high of 5.02% on October 23 and 4.92% at the start of the week.
There are a few reasons to think this top in yields (and bottom in bonds will last).
1) The wave of buying
The FOMO that hit the bond market this week showed just how much money was waiting on the sidelines waiting to buy Treasuries and Treasury-proxies. Everyone was waiting for the BOJ, Fed, quarterly refunding and non-farm payrolls. When all those events were benign, the buying hit. Now there might have been some derivative squeezes in there or short covering, but I think that by-and-large, it was real money. There is much more behind that and if we get back close to 5%, it will be there.
US 10 year yields
2) The psychology was a tell
A couple weeks ago, people were talking about a rise to 6 or 7% yields. That kind of talk is always a dead-giveaway about a market that’s gotten ahead of itself. It was the same thing when people were talking about $100,000 bitcoin, $200 oil or dozens of other big trends. Whenever the hyperbole starts, the move usually ends.
3) The economy is slowing down
The data is beginning to show what the Fed wants to see. It’s tough to say right now whether inflation will get stuck at 3.5% or fall all the way to 2.0% but it’s not-reaccelerating. Ultimately, we will go where the data takes us but with non-farm payrolls and ISM services slowing, it’s a good bet that more weakness is coming.
The big hurdle in the week ahead will be another 10-year Treasury auction. I expect yields to range in the 4.50-4.75% area for a time and we will see if buyers show up near the top of that range. If so, it will confirm the top.