We've talked about the bullish setup for bonds, starting with the reversal signal in the 2-year Treasury yield, which was soon followed by a similar signal in the 10-year yield.
As we discussed on Friday, recent inflation data and Jerome Powell's acknowledgement that financial conditions have tightened (influenced by the rise in bond yields since their last meeting), supports the case for the continued Fed pause.
The WSJ agrees. In advance of this week's Fed meeting, the Fed insider at the Journal penned a piece today titled, "Higher Bond Yields Could End Fed's Historic Rate Rises."
Related to all of this, as I said in my October 23rd note "bonds are a buy."
Barron's agrees. This was the cover story over the weekend …
This, for bonds, all comes as speculators have been net short treasury futures (i.e. betting against bond prices) at record levels.
And as we also discussed last week, such extremes in market position tend to be contrarian indicators.
Remember, the last time the market was positioned near this extreme of a short (betting against bond prices) was September-October of 2018. Those bets were wrong. It was the turning point, and those levels weren't seen for another four years.
With all of the above in mind, let's look at some scenarios for bond prices:
1) If something breaks in the financial system, we can be sure that the Fed (and/or global central banks, in coordination) will respond (by buying bonds and/or cutting rates). Bond yields go down, bond prices up.
2) If the Fed is indeed done with the rate cycle, as inflation continues to fall, then bond yields go down, bond prices go up.
3) In the event of wartime spending (even if inflation goes up), the Fed will be forced back into "emergency policy." And as we've discussed, the World War 2 playbook entailed yield curve control. Bond yields go way down, bond prices way up.