Yesterday we observed the biggest 2-day steepening in the 2s30s yield curve since the Trump election, following a confluence of events which we discussed in this post, and which resulted in a generous payday for at least one rates trader.
So has the long-awaited moment of a long-end selloff arrived? Or, as SocGen’s FX strategist, Kit Juckes, put it, are “Bonds on the run?” Maybe not so fast, especially since much of the recent increase in yields has been for breakevens. Here are his thoughts.
Bonds on the Run?
The Tax Bill is still moving towards the Oval Office, and even critics concede that it boosts
growth a bit (more from the corporate tax cut than from the income tax cuts). While the
relationship between growth, economic slack and inflation remains as much a mystery as how
Father Christmas gets down the chimney, an uptick in breakeven inflation and in 10-year Note
yields isn’t shocking. The more breakevens rise, the less real yields rise, the less this affects the
dollar, unless or until it triggers a wholesale rethink on where Fed Funds are headed. So far, the
market remains convinced the destination is 2-point something. Bearish bond bets may make
sense, but FX conclusions are messier. We like short yen trades for now, but as with any carrybased
FX trades, it feels a bit like picking up pennies in front of a present-loaded sleigh…
This post was published at Zero Hedge on Dec 20, 2017.