Treasury
Pennant formation, likely to go back to 1% if Biden’s fiscal proposal/reflation expectation fail to come to fruition.
The past week has been a short one with the Treasury yields moving in small range above 1.07% and below the local high of 1.186%. A consolidation that would be characterized as a pennant formation. From a technical perspective, it would historically be consistent with a breakout toward higher rates.
However, Ian’s bias was that with all the major bearish inputs have occurred during the first two weeks of January, the delayed blue sweep, the push for the reflationary trade, a bunch of supply come to the Treasury market and still 10 year struggled to get to that one 1.25 level. And as looking to the balance of January and through February, a lot of those assumptions are going to be challenged. How much of the $1.9 trillion fiscal proposal from Biden will actually make it into law? Especially considered Democrats’ slimmest possible senate control. A lot of the repricing was based on expectations that have yet to come to fruition, whether that’s on the reflationary side or the fiscal stimulus side. One thing is safe to assume, if nothing that drove rates to 1.19 comes to fruition, we’ll be back to 95 basis points in relatively short order.
Inflation
Realized inflation is likely to drop, while expectations go for cycle highs.
We all get it that at some point, all of the stimulus coming from the Fed as well as Washington will eventually lead to higher consumer prices. But in the near term, the base effects created by the March, April and May drop in prices as the most tangible input to see a near term spike in realized inflation. The difference between actual realized inflation and inflation expectations need to be emphasized, which might ultimately leave the market in a situation where core inflation continues to grind along at a benign pace while break evens continue to push to cycle highs.
Equity
So far so good, keep monitoring for signs of reevaluation.
The one asset class that has delivered relatively consistent performance thus far in 2021 has been the domestic equity market, and given the relevance of equity volatility to financial conditions and ultimately the Fed’s path of monetary policy, Ian’s team will continue to monitor closely for any wobbles or any evidence that the backup in rates has led to a reevaluation.
Update
Realized yield move of the week Jan.25th, 2021
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