Good Tuesday AM,

After yesterday’s surge to lower rates, the 10-yr Treasury closed at 1.18% and mortgage bonds were +25bps. Bonds are now in an overbought status and prone for a pullback. In fact, we have seen the ten-year move from up nicely to now down on the day. This is normal. Traders take profits along the way up. What we do not know is how much will they pullback before resuming their upward climb in price. My guess is that the pullback will not be too steep, but this depends on whether this massive turnaround in the stock market continues or not. Keep in mind that yesterday’s bond rally was sparked by a large sell off in stocks but that statement taken alone is missing the critical component of ‘why’. Stocks (or bonds or other financials) don’t just sell off for no reason. Considering last week’s high of 1.42% on the 10-yr,  it’s safe to say we’re in the midst of a snowball rally. It seems pretty sure it’s mostly about Covid. 

So, what’s up with Covid?  Well, case counts are rising at their fastest pace since January. The Monday vs Monday increase was substantial (56.9k vs 33.9k).  It was also the highest Monday since April 19th in outright terms.  The recent ramp in case counts clearly corresponds with the drop in yields. The extent to which this snowball rally in bonds can continue depends heavily on the extent to which case counts continue spiraling upward.  With a meaningful percentage of the population vaccinated, one would assume (or at least hope) that the sort of case count spike seen in the Fall/Winter isn’t on the table.  Either way, it’s good to remember that case counts are only important to the extent they translate to economic damage. A rally in stocks will rob those bond gains. I see this bounce in stocks being short lived and in the next few days, we could see stocks resume the selloff and hopefully bring bonds up in price as this happens. For now, if you float just know that the pullback could last a few days and you may have to wait to see again what you can have right now..  

Please remain safe and healthy, make today great!