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The Bond Column

Bogeymen Back in the Closet
Updated: 2017-09-18, 08:56:06 ET
Analyst: Pat O'Hare

It took just about three weeks for the yield on the 10-yr note to drop 20 basis points to 2.07% on September 5.  It has now taken just five trading sessions for the yield on the 10-yr note to increase 13 basis points to 2.20%.

That reversal isn't a complete surprise.  We said last week that the recent rally in the bond market might be running on borrowed time if any of a host of factors (or several) that prompted some safe-haven positioning lost some of their safe-haven luster.

Sure enough, that is what has happened to fuel some profit-taking interest in the Treasury market.  Specifically:

  • Hurricane Irma didn't wreak as much havoc as feared in Florida (though it still wreaked plenty of havoc)
  • The boiling tensions between the U.S. and North Korea were reduced to a simmer after North Korea held off on another missile test over the weekend and continued to hold its test fire after the UN Security Council voted unanimously to impose new sanctions that include a cap on oil imports and a block of textile exports
  • Congress agreed to a three-month extension for government funding and the debt ceiling without any eleventh-hour drama
  • Talk of progress on tax reform and a bipartisan meeting at the White House on the issue stirred a modicum of hope that perhaps a deal could get done before the end of the year; and
  • The major equity indices rallied to new record highs on a relief trade tied to all of the above

Those factors have simply led to some unwinding of the safety premium that had been built into the Treasury market over the last several weeks.  It's pretty much as simple as that.

Investors of course know where to go if something scary pops up, but for now, most of the Treasury market's bogeymen have been pushed back into the closet and that has made things a little less scary at the moment for short sellers.