Yields fall another 6 basis points
If this is a short squeeze, it’s an ugly one. Data at the end of June showed that shorts actually added in the month, despite the squeeze after the Fed, so it’s not out of the realm of possibility that this is another squeeze.
Yesterday’s volumes were 2.15x normal with much of the flow in 10s.
What’s puzzling is that this move is pretty much a bonds-only story. Equities are bouncing around but it’s not exactly the ‘flight to safety’ trade in equities, which hit record highs seven days in a row before yesterday.
Aside from short covering, the usual suspects are:
- Variant worries
- Stimulus fading leading to a soft economy
- The Fed overplaying its hand and hiking too early
- Foreign demand
- Turn of the quarter
None of those truly add up and BMO highlights that price action has become the story:
In the absence of
reinforcement from the prior anchors of macro indicators, investors are left in
the uncomfortable position of taking cues from the price action itself – a
dynamic that has proven thematic throughout the pandemic. Beyond the subtle
ratifications of the technicals, the current trading environment has departed
far enough from the traditional fundamental inputs that investors are beginning
to question ‘how long the market can be wrong’ with such frequency that we’ll
err on the side of assuming the drift toward lower rates has yet to fully run
its course. Not only do the charts support another wave of bullishness, but the
persistent short-base offers an obvious touchstone for lower rates in the event
a trigger is on offer.
Technically, 1.25% is now in focus and the gap from 1.222% to 1.208%.