Relentless Bond Rally Has Traders Wondering What They Missed
- 10-year TIPS auction may draw record low yield next week
- Strategists ponder if bonds signal slowdown or Fed misstep
For the past few months, Priya Misra viewed the bond rally as mainly driven by technical factors such as market positioning that would soon reverse.
Twice, the global head of rates strategy at TD Securities recommended her clients bet against the rally in Treasuries, expecting strong economic momentum and elevated inflation to push yields higher. Twice, she was forced to abandon the call as bonds kept gaining.
Now she’s wondering if falling yields point to cracks in the global economy and the possibility that the Federal Reserve is making a policy error by signaling plans to pare stimulus more quickly than investors and traders may deem appropriate.
“We can all see why technicals can move us away from fair value for some time,” Misra said. “But if it stays there for two months, that’s when you start thinking it must be something fundamental here, or big asset allocation here. It’s not just positioning because nobody is fading it. It’s a weird market.”
The bond rally that was initially dismissed by investors and analysts as having little fundamental support has proven persistent. Yields on 10-year Treasuries are on track to fall for four straight months, something they haven’t done since the onset of the pandemic. At around 1.3%, they’ve dropped from a more than one-year high of 1.77% at the end of March, in part amid the rise of dangerous Covid-19 variants.