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Let's Pop All the Hype About a Bond Bubble

Three things tell me not only isn't there a bubble, but we actually might see a near-term bounce from a trading perspective.
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With bond yields continuing to move higher on growing concerns about inflationary pressures, chatter about a bubble has picked up.

I am bearish Treasuries, I think yields are going higher -- but gradually higher and not without some bounces. I believe it is perfectly reasonable to be bearish on Treasuries, but NOT think we are going to see a taper tantrum or any sort of bond bubble.

The Bubble Case

The bubble case is quite simple, and not without merit, as we agree with many of the premises, just not the conclusion.

1. Inflation is coming:

-- Fiscal Stimulus

-- Defeating COVID

2. Supply is coming:

-- The Treasury is going to have to fund all of their expenditures.

3. Technicals will take us to much higher yields, rather quickly:

-- Convexity hedging on mortgage products will kick into high gear (I think the risk is overstated, but am watching)

-- Crowded longs? People seem to be arguing that investors own too many bonds. A few months ago I would have said that (and did say that), but I don't think that is the case now. Just look at ProShares UltraShort 20+ Year Treasury  (TBT) , one of the "worst" ETFs of all time, getting inflows, a sign, that sentiment is far from bullish in Treasuries.

Why Not a Bubble?

I am not in disagreement with the bearish case, I just disagree with the bubble argument.

Three things give me a lot of comfort that not only isn't there a bubble, but also, we might see a near-term bounce from a trading perspective:

1. I see positioning as balanced and possibly skewed to being too bearish, which makes it difficult to see a bubble type of blow-off.

2. The Fed is more resilient than the bears give it credit for. I stick to my view that:

  • The Fed won't think about hiking unless unemployment is at 3%.
  • The Fed won't think about hiking unless inflation is well above 3% for at least six months.
  • Any possibility of the 30-year yield being able to get to 3% will be met with jawboning (if not actual policy) to keep it lower.

3. Corporate issuance should be a lot lower too. As rates rise, corporations will issue less, easing the overall bond supply pressure.

Don't Let Yield Fears Trick You Into Thinking there are Credit Fears

The main point of today's column is to calm fears about rising yields, but I also want to point out, that while longer-dated invetsment-garde funds are seeing outflows (and so is high yield), it is a reflection on rate risk and not credit risk (aggregate funds, leveraged loan funds, and short-dated corporate bond fund flows all still good).

Stocks might have more room to sell off, but rates aren't the only issue facing some sectors of the stock market.