The rally in bond markets of late has been startling. As hopes grow that inflation may have peaked, and evidence of a U.S. economic slowdown build, benchmark 10-year Treasury yields TMUBMUSD10Y, 2.805% fell from around the 3.5% level touched in mid-June, to near 2.5% at the start of this week.
A 100 basis point retreat in less than two months is a very sharp move, and unsurprisingly it had some observers questioning whether the market had overshot. Sure enough, some hawkish commentary from Federal Reserve officials on Tuesday saw yields bounce in one of the biggest shifts in five years. Little wonder the MOVE index that tracks Treasury volatility remains elevated.
But Bank of America rates strategist Bruno Braizinha says that though “the easy part of the rates rally is behind us” it’s likely benchmark yields could drop further.
“The recent pivot in market focus away from inflation and towards deteriorating growth fundamentals pushed 10-year Treasury yields towards its fair value range faster than we had anticipated,” says Braizinha in a note.
Source: Bank of America
“A further rally from here is possible and even likely, but how much further depends on a series of fundamentals and more technical drivers,” he adds.
One of these is the likelihood that the bond market is underestimating the risk of an economic hard landing. Another is that riskier assets, which have yet to accept such a scenario, are vulnerable to a sell-off, with funds moving into havens. And Treasuries may receive more of those flows because of a perceived safe-haven scarcity.
“Gilts have not been seen as a safe haven for a while, the role of JPY has been shaken lately, and the utility of bunds as defensive is put into question by the likely impact of sanctions linked to the Russian invasion of the Ukraine,” says Braizinha.
All told, BofA reckons that 10-year yields could fall to 2% under a more significant economic slowdown. But even in what it terms a soft-landing scenario the longer duration bond will be comfortable in the 2.25-2.5% range.
“We recommend trading rates with a bullish bias, adding to longs on backups in yields,” says Braizinha.
Separately, support for the trade may come from seasonal factors in the short term, too. The chart below from Deutsche Bank shows how August tends to be a good month for bond prices, and falling yields.
Source: Deutsche Bank
Markets
S&P 500 futures ES00, +0.93% are up 0.6% to 4,118 and Nasdaq 100 futures NQ00, +1.77% are adding 0.6% to 12,996 as traders regather their poise after the latest dip. The dollar index DXY, +0.50% is giving up some of the previous session’s gains, easing 0.1% to 106.18. Gold GC00, -0.85% is down 0.3% to $1,785 an ounce and Bitcoin BTCUSD, +1.51% is climbing 1.6% to $23,379.
The buzz
PayPal shares PYPL, +10.45% are jumping 13.6% in pre-market action after the payments group revealed stock buyback and cost saving programs, a new chief financial officer, and confirmed that activist group Elliott Management had built a stake.
Investors are swiping left on Match Group stock MTCH, -17.23%, down 20.9%, after the Tinder owner delivered disappointing results following the market close on Tuesday.
Earnings reports on Wednesday included Moderna MRNA, +16.15% and Under Armour UA, +1.09% before the market opened. EBay EBAY, +3.12% and Qorvo QRVO, +1.57% come after the closing bell.
U.S. crude futures CL.1, -2.23% are gaining 2% to $96.32 a barrel, moving off a five-month low, after OPEC was reported to have agreed a 100,000 barrel-a-day increase in production.
U.S. economic data for Wednesday: the July ISM non-manufacturing survey and June factory orders, both due for release at 10 a.m. Eastern.
Stock markets in Taiwan Y9999, +0.20%, Japan NIK, +0.53% and Hong Kong HSI, +0.40% were steadier as regional tensions eased in the wake of House Speaker Nancy Pelosi’s visit to Taipei. The Taiwan National Stabilization Fund said it was on standby to intervene in the market if needed.
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The chart
Respect the corporate put says BNP Paribas. Companies purchasing their own stock provides a useful underpinning to the market, and the chart below shows announced buybacks at more-than-a-decade highs.
Source: BNP Paribas
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
| Ticker | Security name |
| TSLA, +1.02% | Tesla |
| AMC, +4.25% | AMC Entertainment |
| GME, +3.49% | GameStop |
| AMTD, +1.00% | AMTD IDEA Group |
| HKD, -34.96% | AMTD Digital |
| AMD, -3.43% | Advanced Micro Devices |
| NIO, -1.34% | NIO |
| PYPL, +10.45% | PayPal |
| AMZN, +2.97% | Amazon |
| APDN, +71.96% | Applied DNA Sciences |
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