Winter Comes for Bond Bears

December 21 is the first day of winter in the northern hemisphere but cold season could last much longer in the bond market if the latest moves are an indication. The euro was the top performer Wednesday while the yen lagged. Kuroda speaks later. A EURUSD trade was allowed to be stopped out. The video for Premium subscribers below highlights our existing trades and strategy. 

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All the talk this week has been about the US tax bill and stock markets but the bond market is quietly wilting. German 10-year bund yields are up 10 bps to 0.40% in the past two days and US 10-year Treasuries are trading just below 2.50% -- the highest since March.

Part of the rise is supply – the US tax plan will mean more bond issuance. If it results in more growth it will also mean higher interest rates and better global growth. Ultimately, inflation will result and if it climbs up to 2-3% then it's going to be a painful year ahead.

Wednesday's trading could be a preview of what's ahead. The yen quietly slid across the board with EUR/JPY gaining more than 100 pips.

Japanese bonds are pinned to the floor because of the BOJ's yield curve control program. Despite improved prospects for growth, there are no signs of any change in course.

Even at these levels, USD/JPY is lower than it should be. If 10-year yields can get to 3% then the pair will almost surely rise above 120 and potentially significantly higher.

Of course, that all depends on what happens next in bonds. Congress passed the tax cut bill on Wednesday and Trump will sign it in the week ahead. The main risk now is 'selling the fact' or flows related to year end and the new year.

But first, BOJ Governor Kuroda speaks in a press conference at 0630 GMT.