April 19, 2021
The fundamental justification behind the recent pullback in bond yields must be rooted in concerns around the sustainability of the global recovery. Europe’s slow vaccine rollout and associated restrictions are probably the main cause. But last week’s bank results would only contribute to the theme with still-weak loan growth as the most common feature. While it’s too early in the recovery to see loan growth improve (tends to lag by 2-4 quarters), the results may have stirred memories of the protracted slow loan growth environment that followed the 2008 financial crisis. Our explanation for the pullback in yields is mostly based on technical and positioning factors after bond prices moved to deeply oversold levels in mid-March with CTA and risk parity funds net-short Treasuries. CTAs and risk parity funds have likely since unwound those short position, which removes a positioning headwind for higher yields.