We're Seeing a Generational Low in U.S./Global Bond Yields
It is my view that bond yields have likely made a generational low in the last few days, just as the generational low was made in stocks back in March 2009.
Following the Brexit vote the yield on the U.S. 10-year note hit an all-time record low of 1.35%; I believe this could be a generation low in yields based on the following observations:
* Weak Auction: Today's auction features were horrible, the sort of a weak reception one would expect at an interest rate low.
* Strength in Financial Stocks: The rally in bank stocks, a sector that typically trades inversely with bond prices, has been impressive since last Monday.
* Municipal Bond Fund Prices Are Collapsing Today: After outperforming since December 2013, closed-end municipal bond funds appear to be finally rolling over. The declines are broad-based, with several funds -- for example, Invesco Pennsylvania Value Municipal Income Trust (VPV) and Eaton Vance Municipal Income 2028 Term Trust (ETX) are down by almost 2% today.
* A Bullish Sentiment Extreme in Bonds: An unscientific sampling of talking heads in the business media counts 14 bond bulls and zero bond bears in the last four trading days. There is a building and near-unanimous view that rates will not rise for years, which is in marked contrast to months ago when the consensus was for higher rates. In other words, just as the generational low in equities was realized in March 2009 when sentiment was at a bearish extreme, the current investor sentiment in bonds is at a bullish extreme.
* Current Yields Imply Slower Growth Than Is Likely: As I recently documented when Iplaced short iShares 20+ Year Treasury Bond ETF (TLT) on my Best Ideas List, the 10-year U.S. note yield of 1.35% late last week implied a nominal U.S. GDP growth rate of slightly less than 2%. In light of the fact that the implied inflation rate according to Tips is about 1.5%, this means that annual real GDP was implied/expected by the fixed-income market to average below 0.5% growth going forward. This is an unlikely expectation.
* Breakevens Are Climbing: According to my buddy/friend/pal The Lindsey Group's Peter Boockvar, the 10-year breakeven is up by 3.5 basis points today to 1.49%. The figure was as low as 1.37% post-Brexit and was under 1.20% in Feburary. The five-year breakeven is up by almost five basis points to 1.47% today. The Brexit low was 1.28% and the February low was 0.95%.
* Japan Reflation Policy: A large Japanese fiscal stimulus package would be an acknowledgment that the Bank of Japan is running out of existing bonds to buy and if it starts direct monetization of any new fiscal stimulus plan, this has the potential to finally be inflationary for Japan.
* The Flight to Safety Is At Its Extreme: Concern with the state of the Italian banking system and growth worries in Europe after the Brexit vote has led to another (and possibly final) panic into European bonds. Though Europe's growth prospects are still uncertain, Italy and the eurozone may be close to an agreement. A temporary resolution of the Italian banking crisis could quickly reverse "the flight to safety" and pierce the bubble in European bonds, which have acted as a depressant on U.S. bond yields.