Bonds Are Back

The recent “Trump reflation trade” related bond selloff that caused Treasuries to spike may have been premature or overdone.    The 10 year T spiked from 1.77% on election night to 2.60% last month which led to speculation that the “great bond market rally is over.”   Note that every time this prediction is floated in recent years, the bond market comes back as if in a state of equilibrium that can’t be deviated from: a.k.a. the “New Normal.”   Today the 10 year T is 2.21% after hitting a recent low of 2.18% early this week.   Why?   (1) Fiscal policy expectations are being dialed back significantly as Congress and the administration indicated that tax reform is not happening soon and there’s no consensus among the factions on the final structure.   Administration officials are indicating that August would be the earliest for a package to be done and this would probably push it to the 2018 tax year at the earliest.   Also, the expected “big infrastructure” program is nowhere in sight.   (2) Weaker than expected US economic reports (CPI actually went negative, 1^ST quarter GDP expectations flattening, etc.); (3) Geo-political concerns – French elections later this month may pave the way to their exit from the EU, tensions on the Korean peninsula, Syria turning into a Cold war style proxy war, etc.; (4) Inflation – The 10 and 30 year Treasuries are indicators of growth/inflation expectations. With lower CPI and oil prices dropping, the yield curve may be flattening despite the Fed raising short term rates. stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.