MBS Live Day Ahead: A Brief History of Bonds' Break-Up With Econ Data
Remember simpler times when following interest rate movements meant waiting for economic data to come out and counting on logical, repeatable, predictable impacts? For instance, today's Existing Home Sales report has always fallen somewhere in the lower rungs of the market movement echelon, but even then, a big deviation from the consensus was still worth a bit of movement in the implied direction (i.e. weaker data would help bonds a bit and stronger data would hurt). That almost certainly won't be the case today--nor has it been the case for a vast majority of economic reports recently.
Defining "recently" is a matter of debate as well. The econ data correlation breakdown has been in its most glorious heyday since coronavirus became a thing, but it was nearly as prevalent for several years before that. Credit the absence of inflation and a generally strong economy. More than anything, we were just waiting to see what was going to derail the record-setting labor market expansion and broader growth cycle. Left to these devices, the bond market playbook consisted of the following:
- A big bounce at all-time lows in mid-2016 (brexit) implied a technical correctio
- Keep an eye on Treasury and corporate debt supply. More supply = higher yields
- Lower tax revenue implied more supply, and the tax bill passage solidified that in early 2018
- Record setting stock prices implied money moving out of bonds and into stocks
During that time (2016 through 2018), one could argue bonds were weakening due to a decent surge in econ data, but notably, the best surge occurred in 2017--a year where bonds rallied. It wasn't until the tax bill passed that yields were on the move higher again. Finally, the global economic slowdown of 2018 took its toll, rates moved logically lower, and the gains only continued as the trade war flared up. The stock market--which had been growing concerned, perhaps, about overly high rates, ignored the trade war implications and instead took solace in rapidly declining interest rates.
As persistently sluggish econ data and trade war fears finally argued for a logical re-connection with bond market momentum, 2019 drew to a close with bonds bouncing just before hitting all-time low yields again. Progress was being made on the trade war, and it was time to forget the econ data and focus on that instead. And they would have gotten away with it too if it weren't for that pesky Covid!
Bottom line: we had a nice opportunity to witness some good old fashioned correlation between econ data and the bond market in 2018 and early 2019, but we've been more focused on external events ever since. The trade war has been replaced by Covid, and neither plays by exactly the same rules.
Stocks seem thrilled with stimulus, low rates, tech sector leadership, and I don't know what else. But now that stocks might be having second thoughts about surging back up into all-time highs, what's next?
Money fleeing the stock market (if it continues to flee), needs somewhere to go. Not all of it will go into the bond market, but perhaps enough to reinforce a sideways range in bonds. One thing's for sure: bonds have given absolutely no indication of a bias in one direction or the other since stocks topped out. Before that, they (bonds) were clearly trending higher in yield (in August). Now they're in wait and see mode.
To reiterate, the waiting is less about econ data/events and more about things like stock market momentum, covid developments, Fed policy, factors affecting Treasury supply, and of course the upcoming presidential election.