The strong bid in the bond market continues to play out

10-year Treasury yields started the year at 3.83% and as of today, we are down nearly 50 bps from that as the strong bid in the past three weeks continues to take shape. The drop in yields this week takes out a key trendline (white line) and is now contesting the 200-day moving average (blue line):

Those are significant technical developments as it could lend to a further bid in bonds, should we see said levels give way.

So, what’s behind the latest rally in the bond market?

Well, for one, it isn’t something that is suddenly happening as we have seen yields fall off from the peak since November – ever since broader markets became more convinced that inflation pressures are abating.

However, the Fed remains adamant that they aren’t taking their foot off the gas pedal – despite having seen tweaked their communique at the end of November here.

There are a few moving parts at play and perhaps it is a combination of things that is really driving the rally at the moment:

  1. Market players are following the data and softer inflation is the name of the game now
  2. There are tentative signs that there might not be a soft landingthat means a peak in rates could come sooner and conveniently this also lends itself back to the classic risk trade ie flight to safety in bonds
  3. The market really just doesn’t believe that the Fed will follow through and given global economic circumstances, rate cuts might be on the agenda especially if inflation falls faster than anticipated

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