August 10, 2021
Ten-year Treasury yields closed just above technical resistance levels in the 1.28%-1.32% range yesterday. A more significant breakthrough is required before 10-year yields advance to stronger secondary resistance near ~1.45%. Ultimately, we expect a retest of the 1.79% level from 2018 with the ability to extend toward ~1.95%.
Visibility: Markets generally price for a window that includes the next 6-9 months as visibility beyond that range becomes increasingly challenging. The rise of the delta variant (mid-May), updated summary of economic projections from the June 16 Fed meeting and crowded Treasury positioning drove bond yields to levels that normally reflect late cycle/end of cycle dynamics. This cycle is different from past recoveries because policy support has been unconstrained by moral hazard concerns (no one to blame). There’s also no evidence of significant economic scarring that typically follows a recession. That lack of scarring is partially to blame for the supply constraints/pricing pressures we see today, but its reasonable to assume some of that gets solved in our 6-9 month window. The slight deceleration in global PMI data since late May doesn’t come close to signaling contraction, while developed market PMI continue to signal rapid expansion. The recovery is likely still in very early innings. We stay pro-cyclical/value as long as developed market PMIs stay north of 55. US July manufacturing PMI came in at 63.4 and services PMI was 64.1, while Eurozone PMIs sit at all-time record highs. Expect strong global growth as pent-up consumer demand follows the geographic recovery from the pandemic. Positioning against the reflation trade has become extreme and we look for higher bond yields with reflation and reopening themed equities to outperform in the 6-9 month window.