Last week saw Fed Chair Jay Powell unleash “inflation averaging” which appeared to embed a “whatever it takes” mantra into The Fed’s mandate to raise inflation and ignore it.
This, after an initial drop, sent US Treasury yields spiking to their highest since June and heralded calls from every asset-gatherer and commission-raker that “this is the end of the bond bull market” and therefore “buy moar stonks.”
But a funny thing happened on the way to “well, rates can only go higher from here!!” – US Treasury yields rose to very attractive levels for foreign buyers…
For a hedged Japanese investor, this was the highest ‘yield’ since May 2018 and for the hedged European investor, the highest since June and briefly positive at its peak.
Additionally, Bloomberg reports that trader chatter suggests the bond-buying has been dominated by accounts taking off bets against long-maturity debt, as popular so-called steepener trades are pared down.
And one more driver of the win streak for Treasuries is the fact that net short positions in U.S. long-bond futures from speculative accounts were near the largest since 2006, according to data for the week ended August 25.
And the result is that the yield spike from Powell has been completely erased and Treasury yields are now trading back at 10-day lows, back below 64bps…