Bond trader

  • A pair of UBS technical strategists said there’s “growing evidence” that the benchmark US 10-year yield had topped for the year.
  • If that’s the case, they say, it is a “huge game changer on the macro side.”
  • The rebound in the 10-year above 3% has partly been driven by expectations that US inflation and economic growth will improve.
  • A reversal in yields could signal the opposite.

Many on Wall Street have tried and failed to call the end of the three-decade bull market in bonds.

As the 10-year yield recently approached and leaped above 3%, meaning bond prices were falling, this call was whispered again by market commentators.

But two technical analysts at UBS don’t see the bond bull market ending soon — at least not in 2018, even as traders make record bets for the opposite.

“With the break of the 2017 bull trend in US 10-year yields we have relatively clear evidence that our suggested major 2018 yield top is in, which de facto would be a huge game changer on the macro side,” Michael Riesner and Marc Müller said in a note on Tuesday.

The rebound in the 10-year above 3%, fundamentally speaking, has partly been driven by the expectation that US inflation would increase. A drop in yields, as the analysts forecast, could signal a reversal of the so-called reflation theme, which is predicated on stronger economic growth and an extension of the nine-year expansion.

“It would simply imply that the 2016 reflation cycle has topped and it means we are just at the beginning of a major rotation from cyclical stocks back into defensives, which underperformed more than 2 years,” Riesner and Müller said.

Their call for lower yields is on the other side of Treasury speculators, who, on net, recently made record short bets on the 10-year, according to data from the Commodity Futures Trading Commission. But some speculators were most likely squeezed out of their short positions last week as political turmoil in Europe bid up bond prices and sent yields tumbling from above 3%.

“With last week’s significant reversal in US yields, we have growing evidence that the May 15th yield top at 3.11% represents our anticipate major 2018 yield top,” Riesner and Müller said. They expect the 10-year to fall to as low as 2% late this year.

Besides the speculative positioning, they’re watching the charts, as would be expected of technical analysts, who study chart patterns in making forecasts. They said the 10-year broke its September 2017 bull trend, signaling the recent run-up in yield was over.

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