Following yesterday’s strong auction and carefully-worded denial by China, US Treasury yields are back to unchanged (despite bond gurus everywhere calling for the end of days). Given the massive net speculative short position, we suspect the lack of follow-through today has many disappointed but as former fund manager Richard Breslow explains, don’t be upset if your Treasury view is “wrong.”
It’s a shame that talking at cross purposes has become the norm rather than an unfortunate, sometimes amusing, more often annoying, characteristic of modern discussion. Participants like to set up straw men and then declare a gotcha moment when the other side doesn’t meet the criteria. Another manifestation of this problem is the insistence on willingly eschewing nuance and context. Such is the state of debate regarding what is or isn’t happening with the U.S. bond market.
Treasuries are unlike any other asset in the world. They don’t move the same way as other instruments. They serve multiple purposes for a hugely diverse group of people. Buyers and sellers can match up and both be satisfied. Without knowing precisely who is on one side or the other of a trade it is virtually impossible to understand their motivation. In short, there is nothing zero sum about them. Unless you are day-trading futures and think that’s macro investing. Much of this reality has been lost by central bank meddling, but will have to be re-learned as the world inches out of the post-crisis monetary policy binge.
Treasury yields have been on a 30-year trend lower. We’ve all seen the chart. Any monkey could have traded that, I’m told. Unfortunately, hindsight technical analysis doesn’t take into consideration the sometimes multi-year, several hundred basis point corrections that happened a goodly number of times along the way. How would you have described the state of the trend during those episodes? Would you have blithely ridden it out?
Of course, the communication problem lies both in who was the audience you would have been addressing and the very definition you apply to the word “trend.” During those pullbacks, or even on major lows in yields there were both happy buyers at each point and those panic selling to preserve their funds’ viability.
So it is largely irrelevant to take part in the currently trending debate about what’s going on with yields. And rather sad to get worked up about it. If a fund manager in, say, Southern California, foresees an opportunity to make money being short or thinks rallies are meant to be sold over a meaningful time horizon, who’s to say, or at least hopefully with their vitriol being faux, that they are gaming their charts. Similarly, if a Connecticut dealer has had no trouble finding buyers for their inventory, bless them.
Biggest market in the world, many alternative theories of how best to approach it. I can look at global growth, increasing inflation breakevens, fiscal stimulus, forecasts for energy prices, the duration creep of the explosive move higher in shorter duration yields and the clearly higher trading range and conclude this is no time to be bullish. You can shop at Amazon, know fellow millenials who live at home and be smarting from previous incorrect price forecasts and conclude rates always stop somewhere. And we can both be right.
There should be a warning legend in all bond pieces explaining the size, scope and intended audience of what you’re arguing. Or, in fact, it isn’t all that helpful. Long-term investors shouldn’t day trade. And day traders shouldn’t be using long-term charts or cite demographic phenomena.
Lastly, Breslow opines on the subject of the China news yesterday
People who expected that if true it meant they would immediately be seen hitting every bid out there, have no understanding of geopolitical reality.
On the other hand, those who have now concluded that it must have been hokum, neither read the carefully worded official response nor appreciate the long-ball approach of those making decisions in that country.
You can only take instant gratification so far.