What’s the Yields Signal?

Another jumbled mess of a trading session in an exuberant but divergent stock market and whippy FX but bonds, while bonds attempt to stabilize after Monday's selloff. The dollar is off its lows of the day, but still down across the board. EURUSD is off its highs after the ECB said it's studying the causes behind prolonged USD weakness despite rebounding US growth. Ashraf posted the chart below, highlting similarities in DXY weakness alongside the acceleration in yields and indices. Note how DXY bottomed in mid Q1 2018 (after a brief market selloff), while yields extended their gains into year-end. 

Monday's 7-bp decline in US 10-year yields (from 1.10% to 1.03%) is considered a break below its 2-week range support, but keep an eye on the new foundation at 21-day MA (1.03%) and prior 1.0750% support as new resistance.

Normally, that would signal risk aversion or declining economic prospects but that's not necessarily the case at the moment. The Fed is buying $120B in Treasuries and MBS per month while re-investing maturing securities so that's a natural skew in the market. One force driving down yields was yesterday's remarks from Senate Leader Schumer saying Congress will try passing the stimulus bill in month or more, far longer than was expected by markets. This lingering disappointing may also explain why indices are reluctant to build on Tuesda's earlier gains. 

Any further decline in yields would be likely accelerate selling in USD/JPY and USD/CHF as yield differentials narrow while boosting EUR/USD. The problem is that the opposite happened on Monday in what was a strange day in markets driven by unusual moves in equities.

Much of the broader discussion in markets is about bubbles and there are measures like the Citi panic/euphoria model, which is at an all time high; and the BofA fund manager survey showing record levels of risk taking.

Bonds might be giving us an early signal that it's all run too far. At the same time, bonds themselves will become the story on a fall back below 1%. That would signal more easy money for equities and we've little doubt that Powell will be supportive on Wednesday.

In summary, it's a market without a real theme right now besides anticipation of the post-virus boom. US stimulus talks have tried to fill the void but haven't been able to capture the market's imagination.