The rally action in the Treasury market seems contrary to the jobs data on Friday. It also seems contrary to the historic rally in equities and the long-anticipated shift in the Fed from all-out easing toward less accommodation. There appears to be a large contingent that firmly embraces the “transitory inflation” view, despite several signals that would indicate something more significant. Recent yield curve action suggests long rates will continue to be held down, and there are concerns in China about a slowing economy and stubborn delta infection counts.
There have been several US economic releases over the last month that have depicted weakness in the US economy and have kept the idea of a compliant Fed alive. The Treasury market has shown consistent resiliency, where minimally weak economic data sparked gains and strong data elicited very little pressure. Another example of bullish sensitivity has been the market’s recent interpretation of yield curve flattening and even inverting, with some traders viewing it as a sign of a return to recession while others as a sign of a shift into a rising rate environment.
With the Fed supporting Treasury Bonds, the October lows near 157-00 could be very solid, especially if there are no front-page inflation scares or the market does not suddenly embrace ideas that the delta wave is coming to an end.
In the interim, we see upside potential in December Bonds, perhaps to consolidation highs. There is also a potential for the rally to extend further to the July-September consolidation highs.
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Originally Published on November 5, 2021
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