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Robert Burgess

Even Bond Traders Don’t Believe This Rally

Quirky market structure forces lead market commentary. 

Don’t sleep on cash.

Don’t sleep on cash.

Photographer: Andrew Harrer/Bloomberg


Now we know. The rally in government bonds that pushed yields on benchmark 10-year notes down from more than 3.20 percent in November to less than 2.55 percent last week wasn’t a sign that the U.S. economy was about to roll over into recession. Instead, like the jaw-dropping plunge in stocks, chalk the move up to exaggerated year-end positioning changes and other quirky market structure forces such as short covering. Just ask bond traders.

The U.S. Treasury Department’s auction on Tuesday of $38 billion of three-year notes drew bids for just 2.44 times the amount offered, the lowest so-called bid-to-cover ratio since 2009. The sale came just a few days after yields on three-year notes fell below the Federal Reserve’s target for overnight interest rates in a phenomenon last seen in 2008. Before the auction, a widely followed JPMorgan Chase & Co. weekly survey showed that bond investors went from being bullish on Treasuries to bearish in the biggest reversal in sentiment since June. That’s not to say that economic growth won’t decelerate, because it will, and there’s enough that could go wrong, such as a prolonged U.S. government shutdown or a glitch in the U.S.-China trade talks or a worsening euro zone economy, that could keep demand for government debt high. But even normally pessimistic bond traders realize it’s too soon to be pricing in a recession. And while Wall Street banks are busy slashing their forecasts for how high yields will rise, the new estimates are still far above current market rates. Goldman Sachs Group Inc. just lowered its year-end projection for 10-year yields by 50 basis points to 3 percent, which compares with the current yield of 2.72 percent. JPMorgan is at 3.20 percent, down from its prior estimate of 3.60 percent.