Bond Market Transition

The bond market doesn't act like it did earlier in the year.  It is not giving sellers a long time to sell at good prices.  The rallies have less staying power.  There is less lingering at the highs.  With the Bund and JGB intermediate to long end yields having very little upside now that they are near zero, non-economic factors such as central bank talk and rumors are causing big moves lower that stick.  In the past, you would get an occasional bit of hawkish talk and it would take the market down but then it would bounce right back up.  Not anymore these days.

For the first time since 2013, we have the 3 major central banks, Fed, ECB, and BOJ all going for less easing.  And that is despite growth and inflation being tame.  The central banks are saving their bullets for when things get worse.  In the case of the ECB and BOJ, they are at a point where QE is no longer going to provide any stimulus, and instead will just make bond markets more distorted and illiquid.

The bond market is starting to catch up to this reality, while positioning is still rather bullish among the fixed income community.  This sets up a potential bond market selloff over the next 3-4 months which could take 10 year yields over 2%, something that would surprise quite a few fixed income analysts.  Plus, you will be getting talk about fiscal stimulus after the election, no matter who is president.  There is a growing group of those in power wanting some kind of fiscal stimulus being passed as monetary policy has gone about as far as it can.

Under these conditions, I can no longer be a longer term bull in bonds.  Sure, there will be short term trades to catch a rally in bonds when they get oversold, but you can no longer just sit back and think of bonds as a long term bet.  They are vulnerable to a mini 2013 taper tantrum type rout.  It won't be as bad as the 2013 selloff in bonds, but even half the move of 2013 would take the 10 year from a low of 1.33% to around 2%.

If the last gasp up move in the US equity market plays out like I expect later this year into early 2017, that should be enough to get the Fed to talk hawkish, the ECB to taper bond purchases, and put pressure on bonds.

By the way, if the bond market had any kind of short term strength, it would be much higher off those mediocre jobs number (+156K) today.  But it is essentially flat from yesterday's weak close.  We should see a bit more bond market weakness over the next few trading sessions, and that will not help equities at all.