Wells Fargo says the pieces don’t fit
Good trading is following the macro trend, fitting the pieces together and managing risk. Great trading is seeing that the price action doesn’t fit the macro picture and knowing precisely when to call bulls**t.
Wells Fargo is doing that today, saying everything about the bond market move is misunderstood, misinterpreted and increasingly mispriced.
“We are witnessing another classic battle between facts and perception,” they write, saying the drop in 10s to 1.26% today from 1.70% doesn’t mean the outlook for growth and inflation have peaked and that cyclical trades are done.
They offer five reasons:
1) The drop in nominal yields has been associated with a nearly 1:1 decline in real rates. “In other words, inflation expectations have been stable, suggesting economic forces are not at the heart of the slide.
2) “Technical issues related to liquidity, positioning and forced buying are driving the bus”
3) The last Treasury sale was June 24 and there’s no new paper until next week. In addition, secondary issuance and liquidity is also limited due to holidays.
4) Surveys showing significant short interest, providing a catalyst for a short squeeze
5) “There is a large and systematic buyer in the market: The Fed, to the tune of $80B/month or approximately $20B/week.
“Combining a lack of liquidity with weak hands and a large systematic buyer, a slump in rates is not surprising. The issue many equity investors do not get very granular when analyzing the rates market, believing the move in nominal rates is driven strictly by inflation expectations; that has not been true recently. Further, inflation expectations baked into the 10y Treasury remain in the 2.0-2.5% range — not what one would expect if the economy was rolling over and investors felt inflation was about to cascade down.”