Feeling Out The End Of 2018’s First Correction


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I started using some more serious words to talk about bond market weakness yesterday, but I’ll make them simple and keep the assessment short this morning.  In a nutshell, we’ve gone from tracking a linear, well-behaved, modestly-positive correction since February 22nd to wondering if that correction just ended.  

We’re merely “wondering” because we haven’t seen enough weakness to confirm it yet.  We’ve also seen other examples of threats to the trend, but perhaps the more gradual approach means the 3rd time is the charm.

Additionally, the last two occasions had help from a slump in stocks (technically, Fed day in late March helped bonds avoid breaking any higher than they did, and then stocks helped get bonds back down to 2.80%).  That might have proved to be a floor for a fourth time in a row had it not been for burgeoning trade war fears.  Now with talk of renegotiating a reentry into the Trans-Pacific Partnership (TPP) as of yesterday, and the general toning-down of trade war rhetoric, this former friend of the bond market is at risk of becoming an enemy.  

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The counterpoint is that the trade war movements are a mere side-show relative to the flash crash already seen in stocks in early February.  If we ponder the meaning of that crash and the reluctance of the stock market to make new highs afterward, one conclusion is that financial markets quickly moved to price-in the effects of fiscal policy (mainly, the tax bill) heading into 2018, and are now simply asking “are we there yet?”

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Whether or not “we’re there,” will likely depend on near-term economic performance.  For instance, will the tax bill meaningfully increase GDP?  Is inflation really set to tick up in a sustained and threatening way?  

As I alluded to in yesterday’s huddle video, I entertain several long-term possibilities when it comes to where bonds may be in the future.  These always include bullish/bearish/neutral outcomes.  They’re always competing in my mind.  The bearish outcome was dominant heading into the end of 2017, but the others caught up over the past 2 months… mostly. 

If one of the voices in my head were to make a case for a bullish shift continuing, it might point out the 2 days of support seen at the 50-day moving average in 10yr yields.  And yes, I suppose if we have a great day today and next Monday, that would look a little less crazy.  But even then, the other voices in my head would quickly point out how frequently 50-day averages are broken, and moreover, even if this is the beginning of a shift, yields tend to bounce in an “M” pattern after the first break of the 50-day average after similar moves.  If you don’t want to worry about understanding what I said in the last sentence, just look at the white circled areas at the bottom of the following chart.  Those are the two most similar recent precedents for the current move.

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