Is it over -- the secular bull market for bonds -- is it over?
The answer will depend a lot on whom you ask, but for the economy's sake, one would have to hope we never see 0.50% for the 10-yr note yield again. That's where we got in early August, but the market has come a long way since then.
Today, the 10-yr note yield sits at 0.85%.
Notably, the 10-yr yield didn't do much when the stock market was selling off in September and it hasn't gone back to its bullish-minded ways despite all the hubbub surrounding the election, another surge in coronavirus case counts, and the likelihood that a big stimulus package isn't going to be approved before the election.
It has been an eyebrow-raising performance and it is enough to make one at least ponder the possibility that things are as good -- or were as good -- as they will ever get for the Treasury market.
There are several components working against the Treasury market in the big picture:The Federal Reserve is unabashedly trying to induce higher inflation rates. The cost of COVID remediation efforts has been massive, producing a huge budget deficit and a flood of new supply to help finance it. There is pressure and a political will on both sides of the aisle to provide additional fiscal stimulus. The current stalemate doesn't revolve around whether there should be more stimulus, but rather, how large the next stimulus package should be. Deficit concerns could be a persistent weight on the dollar that feeds into higher commodity prices and stokes inflation. The introduction of an FDA-approved COVID vaccine could unleash an unwinding of safety trades and pent-up economic activity.
One of the great unknowns right now is just how far the Fed will let this bear-steepener trade go on its own.
Long-term rates moving up isn't a problem per se, as they can be construed as a sign of confidence that growth is expected to accelerate. The problem relates more to the pace at which long-term rates go up, particularly for an economy that is in a recovery phase.
The Fed won't want the Treasury market to be a source of excess financial market volatility and it won't want it to be a cause of slower economic activity at a time when Fed officials are generally aligned around the view that the economy needs more fiscal stimulus to improve the effectiveness of its monetary policy.
At the same time, the Fed doesn't want the 10-yr yield going back to its all-time low (or lower). Getting there would mean the Fed's policy hasn't had its intended effect, as a re-test of the all-time low yield would most likely happen in the face of disappointing growth, disinflation, and/or disdain for stocks for one reason or another.
The Treasury market, then, may be embarking on a new course that charts higher lows and higher highs for longer-dated yields in a carefully managed way, making that 0.50% yield on the 10-yr note as good as it gets for a secular bull market.