Does Breaking The Support Line Mean Mr. Bond Is Truly Out Of Danger?

A wise man once taught me that most trades aren't necessarily "right" or "wrong" but are either in favor or out of favor.

A few posts back, Leftback (LB) took a strong stance stating that Mr. Bond chose to die another day and seems to have been vindicated. Hopefully, LB is sitting on a nice, hefty profit!

Another contributor, Macro Clown (MC) commented in his GBP post that he was a strong believer that duration has entered a long-term selloff, and bonds into a bear market. I happened to have and still continue to share MC's view.

Clearly, the clown's face has been ripped off, and I haven't faired so well myself - as you can see below, 10yr rates pierced that mythical 2.3% support level.  With that said, I just want to remind everyone that this doesn't necessarily mean we are wrong - it could be that the trade is currently out of favor.

Holy technical support levels, Batman!

(It's a very clean break of support, but I would like to remind all veteran traders that technicals usually don't work when all the technicians are fixated on it - we broke 2.30, but now what? Everybody's  and their mom's CMT see this trade. Instead of chasing, I'm looking for a reversal signal)

Although it might seem that all hope is lost on both the fundamental (the last few prints of missed PPI and CPI, poor manufacturing numbers, etc.) and technical fronts, I believe there are potential signs of relief. For example, one of the leading indicator assets that's been the harbinger to the move in US breakevens has been the move of base metals (specifically iron ore in China).

Iron ore has collapsed. Risk reward for this asset is no longer to the downside. If iron ore finds a bottom, that could spell the bottom for inflation and yields.

With that in mind, despite the doom and gloom concerning hard data - it is important to remember that unemployment is still historically low and ISM has been printing at the highest level in a few years. Some assets have held up okay, such as oil, during this sell-off. In the very short end, the market still thinks that the Fed is on track vs the beginning of the year (2 hikes). Inflation (PCE and CPI) have not shown sharp drop-offs either - I know they're slow moving. Nothing in the central bank rates realm has really changed other than psychology. Read: the short duration trade is out of favor.

These tidbits could offer clues of where inflation could go next.

With that said, there are a few gray swans that exist in the market: continuing escalation in Syria (I know - I was supposed to write about this but didn't), North Korea, French elections (suddenly a photo finish - this global election cycle has engrained the idea of never trusting polls in my psyche). DM equities could find itself on false footing and see a drop as well - be careful Harry Hindsight!

These are all valid and possible concerns that can force yields to shoot even lower.

MC wrote about the populist trade getting ahead of itself. We have been witnessing the reversal. Just keep in mind that we could get to the point where the reversal itself gets overdone.

Good luck, don't lose your shirt or your face.

Oh! By the way, I wanted to tell a quick fictional story/obituary that should serve as a lesson for traders of all ages and sizes.

There was once a court.

The court had a jester of the global macro nature and a monkey of the execution variety.

The jester had lofty ambitions outside of the court. All he wanted was to be left alone so he could read, write and trade in the macro world. The execution monkey was simple, always chopping wood and playing on his iPad. The jester thought he had ripped off enough faces with his short duration trade to earn himself immunity in the court.

Little did he know, the monkey would falsely brand the jester a heretic in the court just as the short duration trade roared back, causing the jester to lose more than his face. In one foul swoop, the monkey had killed the jester. Although the jester is currently pronounced dead, with any luck, he will be resurrected, make his return and get the last laugh.

Trades are never always right or wrong - just in favor or out of favor. Look alive out there and stay nimble.