Treasury Rally Advanced? Or Just Starting?
Fears in markets about a US recession have been building in recent weeks. Illustrating that, the rates market has moved relatively rapidly and is now priced for ~250bps of Fed cuts between now and the end of next year/early 2026. That’s a reasonably significant loosening cycle, and it’s been accompanied by a sharp rally in Treasuries across the curve. Most notably, the US 10 year yield has fallen by nearly 100bps since its highs in late April. As FIG 1 shows, it broke below a key support level last week (i.e. 3.79%, which was the low from late December 2023).
In the near term, from a positioning perspective, that rally in 10 year Treasuries is reasonably advanced (and poised to reverse). In particular, bond prices are technically over-extended to the upside (with our key model currently generating a clear SELL signal for 10 year Treasuries, see FIG 2). Added to that, according to the BAML survey, investors’ fears about a recession are widespread (FIG 3) and, linked to that, their OW positioning in bonds has reached high levels relative to history, see FIG 4 (i.e. suggesting that the ‘long bonds’ trade is now crowded).
In the medium term, the key question is: How much more Fed easing needs to be priced into the rates market? Or put another way, is the US economy rolling over into a recession? Or is it merely in the midst of a ‘soft patch’? Friday’s nonfarm payroll report was clearly troubling in that respect, especially given the downward revisions to jobs, as well as the move higher in the number of people who work part time for economic reasons (i.e. because they can’t find a full time job). Having said that, several other indicators have a different message (that recession risk is low). For detailed analysis please see last week’s ‘Longview on Friday’ publication: “Is This Time Different?”.
FIG 1: US 10 year bond yield shown with 50 & 200 day moving averages
FIG 2: Longview medium term technical scoring system vs. US 10y futures
FIG 3: BAML fund manager survey (‘the biggest tail risk’)
Fig 4: BAML fund manager survey (positioning vs. history – z score)
