The head of US fixed income from Wells Fargo was on CNBC today and he made the point that sub-3.5% in US 10s is too low for the environment we’re in. The Fed is now cutting and prepared to cut aggressively to preserve US economic strength.
Sub-3.5% with Fed funds at 4.75-5.00% is a recession call and the data isn’t there, and isn’t screaming that it’s heading in that direction. Inflation is low but sub-3.5% is more than a low-inflation call.
So I’m on board with the idea that 3.5% is the floor, at least until we get some poor data. So what’s the ceiling? Tens have pushed higher for three days but the momentum sagged at 3.77% today and we’ve tracked back to 3.73%.
So does that argue for a 3.5-3.8% range or is 3.6-4.0% more realistic? I can even make a case for 3.75-4.25% based on the Fed easing too much too soon.
US 10s daily
Now the US dollar is more about the front end of the curve than 10s and that’s going to struggle to hold up with the Fed cutting, though the same dynamics are in play. With the Fed cutting 50 bps, 2y yields have barely moved up.
I really liked the line in this week’s BofA fund manager survey that investors are ‘nervous bulls’. That’s a good place in general as bull markets tend to climb a wall of worry. The question is whether they get more nervous or more bullish.
If they get nervous, we could see some USD bids on a flight to safety. But if they get more bullish, we could see the real start of a ‘global growth’ trade, though that will depend on what China does next (I’ve been writing that a lot lately).
So how does that shake out?
Intuitively, higher 10-year yields should be good for the US dollar and I think that’s true in the 3.70-3.90% range as recession fears dissipate. Above that though might be a global growth trade and the dollar will soften. In the middle, that creates a rocky trade and that’s been the case since the FOMC, particularly if you think the BOE is making a policy mistake.