Today’s 5 yr note auction was as boring as yesterday’s 2 yr. The yield of 2.058% was a hair above the when issued. The bid to cover of 2.44 was slightly below the one year average of 2.48. And, direct and indirect bidders took 72.5% of the auction, right in line with the 12 month average.
Bottom line, as said yesterday why are these higher yields not attracting more buyers? The 2 yr yield in yesterday’s auction was last seen in 2008. Today’s 5 yr yield is a 7 month high. I’ve said since August/September 2016 that the July lows of 2016 post Brexit in global bond yields will not again be seen in our lifetime. You will never see a 7 bps yield on a Japanese JGB (now at 1.08%). You will never see a German 10 yr bund yield at -.19% and you will NOT likely to see a US 10 yr Treasury yielding 1.36% again. So, based on this belief the bond bull market ended in the summer of 2016. The only question was the timing and degree of what was to follow.
The major reason for that bottom was that negative interest rate policy was not going to accelerate in those countries that implemented it (it became clear from them that enough was enough). Therefore the $12 Trillion of negative yielding securities was not then going to grow in size. Ever since, anything with a negative yield is just a hot potato liability and not an asset of the holder but that pie has shrunk to about $8 Trillion.
What has happened also since is the global economy has grown together, global trade has improved, the Fed is of course raising rates, QT is in place, the BoJ is in a subtle taper and the ECB is ENDING QE next year with the likely end of NIRP to follow in 2019. I’m of the definite opinion that Fed tightening will put the US economy into a recession at some point as it typically does (10 out of the last 13) and long rates will fall as a result but that will be from a higher level from here. My biggest fear, as stated many times, is what will be of the European bond markets epic bubble as tapering takes place and NIRP ends. That alone will drag up global interest rates regardless of the underlying economic fundamentals. What did Mario Draghi think would happen to the other side of the easing mountain and it was time to hike back down?