Pro Perspectives 10/23/23






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October 23, 2023

In my Thursday note, we talked about the technical reversal signal in the bond market, specifically the yield on the 2-year government bond (futures contract).

That 2-year yield is now 20 basis points lower from Thursday’s highs.

Add to this, today we had a similar signal on the benchmark 10-year yield.

After taking a peek ABOVE the important 5% level early this morning, yields reversed sharply to settle on the lows of the day, around 4.85%. 

As you can see in the chart below, similar to Thursday’s action in the 2-year, today the 10-year put in a technical reversal signal (an outside day).  


Now, this reversal gained momentum when a large hedge fund manager (Bill Ackman) announced on Twitter that he had covered his short bond position.  Ackman thinks a slowing economy and “too much risk,” given the events in the Middle East, will bring demand back into the Treasury market.

On the latter (“too much risk”), global capital tends to flow IN to U.S. Treasuries in times of heightened geopolitical risk, which sends bond prices up/yields down.

That said, global capital also tends to flow IN to the dollar and gold in times of stress.  But both of those markets were down on the day.

Maybe today’s move in yields was more about what happened last Thursday and what’s coming on Friday, and less about what’s happening on the war front.

Remember, last Thursday, we heard from the Fed Chair, Jerome Powell.  He told us financial conditions had “tightened significantly” since the September meeting, and that has been driven by the move in long-term bond yields.  Translation:  If the Fed needed to do more, the market has done it for them (and maybe too much).

On Friday, we’ll get September core PCE.  The Fed’s favored inflation gauge is expected to continue its steady decline, falling to a 3.7% year-over-year change.  And the six-month average monthly change in core PCE has us on path to sub-3% by March of next year.

This is data that should be welcomed by the Fed and markets.

With all of the above in mind, remember last week we talked about the set up for bonds (“bonds are a buy”).  Two of the most liquid bond ETFs, the corporate bond ETF (symbol LQD) and the government bond ETF (symbol TLT), had bullish reversal signals today.