Why Bonds Aren't Buying This Bounce, And Why Guggenheim Expects The 10-Year Yield To Drop Below 1%

While the algos are closely following every momentum-generating uptick in global equities on the back of yet another short squeeze in crude, one asset class that has been roundly ignored are Treasurys, which have refused to follow the equity euphoria and have in fact roundtripped today’s entire risk on move, suggesting that once again, “bonds aren’t buying it.”

And, if Bank of America analysts Shyam Rajan and Dora Xia are correct, don’t expect any “taper tantrumy” bounce in yields any times soon. According to the bank’s analysts there are three reasons against a quick turnaround.

The expected short covering bounce in risk assets and the modest back-up in rates beget questions on whether too much pessimism is already priced in and if we are setting up for a tantrum trade similar to summer 2013 and spring 2015. We do not think so. There are three reasons why this time is different and rates will find it hard to move higher sustainably, absent a coordinated policy response.

1. The move lower in yields is different

Prior tantrums in rates occurred only when the rates market decoupled from risk sentiment and investors were lured into an overweight duration position on the back of QE. This is best illustrated in Chart 1.

2013 US tantrum: Following the announcement of open-ended QE by the Fed, rates decoupled from equities in early 2013 as investors were lulled into duration longs despite strong equity markets on the back of “QE infinity.”

2015 Bund tantrum: The ECB’s announcement of QE in early 2015 led to a sharp disconnect between Bunds and European equity markets, as investors believed that the lack of supply would drive bund yields negative.

Unlike the prior episodes, the current move in rates reflects genuine risk-off flows and not just extended positioning. This is evident in the $45bn of outflows from equity funds and $32bn inflows to bond funds. In contrast, leading to the 2013 tantrum, equity funds and bond funds both had inflows: $38bn for equity and $17bn for bonds.