A SEASONAL PEAK IN BOND YIELDS?
This may sound uncanny, but in four of the past five years, we saw the yield on the 10-year Treasury note hit the peak right in June, and while the experts each time were lamenting about inflation, fiscal policy, growth and beta-assets, not to mention the oft-called-for end of the secular bull market in bonds, the second quarter selloff that culminated in a classic blow off in June proved to be a great buying opportunity. Consider:
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June 14th, 2004: 4.89%. The 10-year note closed the year at 4.24%.
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June 26th, 2006: 5.25%. The 10-year note closed the year at 4.71%.
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June 12th, 2007: 5.26%. The 10-year note closed the year at 4.04%.
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June 13th, 2008: 4.27%: The 10-year note closed the year at 2.25%.
But as the data above illustrate, after the June peak in yields, the 10-year note, on average, went on to rally 111 basis points (in 2005, it did look as though the bond market was looking to peak in terms of yield into June, but then we had the volatility amidst the Katrina hurricane, which begat a quick rally and then a huge selloff during the fall). So we should be seeing a nice little bond rally take hold in the second half of the year if this pattern reasserts itself.
We also ran some correlations and found that the 10-year note yield has the highest relationships with the ‘carry’ (funds rate) at 88%; inflation (68%); fiscal deficits (46%) and the dollar (but with a positive 60% correlation — in other words, bonds tend to rally when the dollar is weak, not the other way around!). So, if the problem for Treasuries is fiscal deficits and the dollar, then we can rest assured that the far more important drivers are the Fed, which is not raising rates any time soon, and inflation, which is hardly going anywhere on a sustained basis, until the dramatic amount of excess capacity gets mopped up and the debt-strained household balance sheet begins to re-expand. Fiscal policy comes in a distant third in the bond yield-determination process and the dollar has the “wrong” sign as far as the inflation-phobes are concerned.
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