Bonds Taper Tantrum Part 2

This is getting really bad in the bond market.  It is a bit shocking to see such carnage in fixed income when the economy is this mediocre.  In 2013, during the taper tantrum, you had 10 yr yields go from 1.6% to 2.9% over a span of 4 months, on fears of the Fed reducing QE.  But $85B of monthly QE was still ongoing throughout the year and was only tapering $10B every meeting, starting in 2014.  So you had buying power supporting the Treasuries as the carnage was happening.  But there is no QE now.  And unlike 2013, you didn't have a potential bullish catalyst for Treasuries like you did with ECB going negative and starting QE.  The ECB is already doing their QE and will likely have to taper because of a lack of supply.

With Bunds already near 0%, there is very little lift that it can provide to Treasuries.  The only thing that will help Treasuries now is the economy slowing more than expectations.  That is a higher hurdle than merely riding on the coattails of a big bull move higher in European government bonds.

I underestimated this bond selloff.  It will not be contained at 10 yr 2.40%.  I see at least a move towards 2.5% and probably closer to 2.6% before you can feel safer buying the weakness.  So no, this isn't as great a buying opportunity for bonds like you had in the end of 2013, or even end of 2015.  This selloff will need more time to mature and build, because the equities are not as vulnerable as they were at this time in 2015, and you won't have the boost from European sovereign yields going lower and lower like in 2014.

And the problem is that the Fed hasn't even said anything yet to fan the flames.  And in all likelihood, you will see a hawkish Fed in December, now that the election is over and Yellen fights back against Trump and his hopes for a low Fed funds rate.   Even though Yellen is a dove, the pressure is building for the Fed to start raising rates as equities keep going higher and CPI inflation stays above 2%.  They mentioned in their minutes that they are worried about their credibility.  If they maintain a dovish tone, they will lose their credibility even faster.

That is probably why you are seeing a flattening of the 5-30 yield spread, as money is betting that the Fed will talk tough about rate hikes for 2017.  And this time, I don't think you will get the big equity swoon to hold them off from their plans so easily.  At least not for the next few months.

This feels like the blowoff stage for equities, and the give up stage for bonds.  Looking out over 2 to 3 months, I am a bond bear, equity bull.  But looking out over 2 to 3 years, I am a bond bull, equity bear.   The fund flows in November are finally making distinct big moves.  Lots of money is going into equity mutual funds and ETFs, finally.  It was a long time coming.  It took optimism about Trump of all people to get those skittish investors to jump into the pool.  All the signs for the final top are there.  We just need to let it play out for the next few months and take the other side.  In the meantime, don't waste your bullets playing for singles.  There will be much bigger opportunities in 2017, as the crowd finally embraces this overvalued, aging bull market.