How Low Can We Go?

By: Mathew Graham Jan 30 2020
With the Fed out of the way, coronavirus cases still growing rapidly, and no major correction seen in the bond market, the question on everyone’s minds is: how low can we go?
While the answer may not depend entirely on the evolution of the coronavirus news, that’s definitely the biggest and most reliable source of bond market motivation at the moment. In other words, the answer ALMOST entirely depends on coronavirus.
In that regard, we’ve seen bonds begin to slow their roll compared to the initial, panicked move that began the week. Overnight low yields of 1.553 are the lowest we’ve seen in months, but they represent a fairly small improvement from the 1.579 and 1.570 lows of the past two days respectively.
They also leave us just microscopically above the 1.55% technical level. That’s not to say it can’t be broken, only that it hasn’t. After that, 1.50 and 1.44 would be the next two levels standing in the way between us and multi-year lows in Treasury yields.
Needless to say, based on the chart above, the big risk is that we’re unable to break 1.50%. That would make the current rally look like the 2nd major dip in yields that got stopped out at “higher lows” (the first being in October). That would add to the sense that bonds found bottom in 2019 and are just waiting for enough motivation to move higher.
The counterpoint to that risk is that bonds will actually need motivation to move higher! The Fed is clearly not hiking rates until inflation picks WAY up and they’re definitely buying more bonds based on where Powell says they want the balance sheet. In other words, higher rates aren’t a foregone conclusion. Granted, a resolution to the coronavirus drama will definitely push rates higher, but we’ll likely need to see a meaningful improvement in economic data at home and abroad for 10yr yields to be very comfortable moving up and over 2%.

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