Scott Peng, the founder and chief investment officer of New York investment manager Advocate Capital Management, made at the beginning of the year what seemed to be a prescient call — that the yield on the 10-year Treasury would spike.
And it did, for a while, surging as much as 83 basis points in the first quarter. But bonds quickly became back in fashion again. In a new note to clients, Peng cites a variety of factors that led yields to then fall up to 60 basis points from the March highs.
For one, the economic data weren’t as strong. The Institute for Supply Management manufacturing index peaked in March, and the ISM services index peaked in May. “While economic data still pointed to growth, second-quarter economic growth was a bit more uneven than the torrid pace of the first,” said Peng, previously Citi’s chief interest-rate strategist.
The emergence of the delta variant of coronavirus, and hedge funds reducing their short positions, also were factors behind the surge in bonds.
Peng, however, expects bond yields to rise once more, saying a number of factors will lead to another bond conflagration. For one, the inevitable taper to the Fed’s quantitative-easing program is drawing closer, while more fiscal stimuli are on the way, in the form of the bipartisan stimulus bill as well as the massive $3.5 trillion plan Democrats will try to push through.
The U.S. labor shortage, a hotter-than-capacity stimulus-stoked economy, and consumers drawing down their accumulated savings all will add fire, he said. The six-month average of the monthly change in retail sales, 2.7%, is more than 5 times the pre-pandemic average of 0.5%, he said.
While the start of a new trend is exciting, it typically ends after too many people pile onto the same side of the boat. “After a correction to reset the supply-demand balance, the long-term trend reemerges. We might be at that critical juncture between the correction and the reassertion of the long-term trend in the rising rate saga,” he said.
In early Monday action, the yield on the 10-year Treasury
TMUBMUSD10Y,
was 1.28%.
The buzz
The stunning fall of Afghanistan to the Taliban — as well as the political fallout for the Biden administration — dominated conversation.
The economics calendar features the Empire State manufacturing index for August, as Chinese economic data came in slower than forecast.
Bloomberg News reported that Saudi Aramco is in talks to buy a $25 billion stake in the oil refining and chemicals business of Reliance Industries, as mining giant BHP Group
BHP,
said it may sell its petroleum holdings.
Hyatt Hotels
H,
struck a $2.7 billion deal to buy Apple Leisure Group from its private-equity owners. France’s Faurecia
EO,
reached an $8 billion deal to buy Hella
HLE,
in a deal it said will make it the world’s number-seven automotive supplier.
Audio equipment maker Sonos
SONO,
won an International Trade Commission ruling that Alphabet unit Google
GOOG,
infringed on five patents.
U.S. stock futures
ES00,
NQ00,
fell to kick off the week. The Australian dollar
AUDUSD,
declined amid the weak Chinese data as well as its own lockdowns.
The chart
What’s untouchable to investors? A poll by Morgan Stanley of institutional investors found “controversial” weapons makers, thermal coal and tobacco as the three most excluded sectors. What also was interesting was that 60% of exclusions were due to firm level policies, and 40% due to a specific fund.
Random reads
An aspiring investment banker is stuck in Afghanistan on vacation. “I like risk,” he says.
The White House released a photo of President Joe Biden. Twitter users focused on two clocks.
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