Why are bond yields plunging?

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This is a bit like asking Dracula why there’s a blood shortage but here’s Goldman with its best effort on why bond yields are plunging:

Q: The reflation theme in markets seems to be unwinding, led by bonds. What is recent price action signaling about the recovery?

A: Since the recent Mid-may highs, both 10y and 30y US Treasury yields have eclined by about 40-50bp. Over the same time, 5y yields have declined by a more modest 10-15bp. Both the 2s10s and 5s30s curve are 45bp and 35bp flatter respectively, and below levels seen before the February surge. Given that the reflation trade has been associated with higher yields and steeper curves, the bond market’s reversal appears to be signaling some concern along this front. We note that this isn’t purely a bond market story—underneath headline index levels, there appears to have been a significant equity rotation out of “value” and small caps, both categories expected to outperform in a reflationary environment. Commodities also appear to have put in a local peak . More recently, our macro PCA factor attribution model suggests that the price movements across asset classes have been associated with shifts in growth assessment, and with only a marginal contribution from a hawkish Fed pivot (Exhibit 1). However, until this week, the repricing was somewhat unusual in that front-end hike pricing was somewhat sticky even as longer maturity yields witnessed a sharp decline. This suggested that markets were pricing a weaker recovery in a few years (perhaps once the fiscal stimulus faded), but a near term inflation path that was worrisome enough to cause the Fed to tighten, at least for a while. That particular scenario, while a possibility, does not appear an appropriate central case to us, at least based on current data, our economists’ forecasts for future years, and the Fed’s apparent willingness in looking through near term price pressures. We would note that price action this week is onverging to a more traditional weak growth narrative, with some front-end hike pricing being reversed.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.