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Opinion
Robert Burgess

Wall Street's Most Crowded Trade Has a Problem

July pain for bond bulls leads market commentary. Plus, a dollar dilemma, cocoa’s cartel and more.

All fall together ...

All fall together ...

Photographer: FF/AFP/Getty Images

Bank of America Merrill Lynch released its widely-followed survey of money managers on Tuesday, and for the second month in a row, being “long” U.S. Treasuries was deemed to be the world’s “most crowded trade.” That worked out just fine in June, but this month it’s looking more like the very definition of a “pain trade.”

Treasuries fell on Tuesday, extending what was already the worst month for U.S. government debt since October, with the Bloomberg Barclays U.S. Treasury Index down 0.47% through Monday. Yields on 10-year notes have risen from as low as 1.94% on July 4 to as high as 2.14% on Tuesday. Considering that yields were above 3% as recently as December, the recent backup isn’t enough to get the bond bears excited. Still, it’s notable because it signals that traders may be sensing that the economy isn’t as weak as thought, and perhaps the Federal Reserve won’t need to cut interest rates three times this year as is currently priced in to yields. This week’s economic data certainly calls into question the need for much easier monetary policy. On Monday, the Empire State index of factory activity in New York State – the first of this month’s regional Federal Reserve manufacturing gauges – rose more than forecast. And on Tuesday, reports showed retail sales and factory output in June both exceeded expectations. The Treasury market yield curve is also signaling less concern about a fall-off in economic growth. At 26 basis points on Tuesday, the difference between two- and 10-year note yields has expanded from 14 basis points in May and is back to where it was in November before the turmoil in markets broke out.