Keep running with bond bulls, Bank of America says

The rally in the bond markets in recent times has been surprising. As hopes rise that inflation may have peaked and evidence of a U.S. economic slowdown, the 10-year Treasury benchmark makes BX: TMUBMUSD10Y
it fell from the roughly 3.5% level it reached in mid-June to nearly 2.5% earlier this week.

A drop of 100 basis points in less than two months is a very abrupt move, and it is not surprising that some observers have wondered if the market had crossed the line. Sure enough, some aggressive comments from Federal Reserve officials on Tuesday saw yields rebound in one of the biggest shifts in the past five years. No wonder the MOVE index which tracks Treasury volatility remains high.

But Bruno Braizinha, Bank of America rate strategist, says that while “the easy part of the rate rally is behind us,” benchmark yields are likely to drop further.

“The recent shift in market focus away from inflation and deteriorating growth fundamentals has pushed 10-year Treasury yields into its fair value range faster than we anticipated,” Braizinha said in a statement.

Source: Bank of America

“A further rally from here is possible and even probable, but how much more depends on a number of fundamentals and more technical drivers,” he adds.

One of these is the likelihood that the bond market is underestimating the risk of an economic hard landing. Another is that riskier assets, which have yet to accept such a scenario, are vulnerable to a sell-off, with funds moving to havens. And Treasuries could receive more of these flows due to the perceived scarcity of safe haven.

“The Gilts have not been seen as a safe haven for a while, the JPY’s role has been shaken lately and the Bund’s usefulness as a defensive is called into question by the likely impact of sanctions linked to the Russian invasion of Ukraine.” , says Brazinha.

All in all, BofA believes 10-year yields could drop to 2% in the event of a more significant economic slowdown. But even in what is called a soft landing scenario, the longer duration bond will be comfortable in the 2.25-2.5% range.

“We recommend trading rates with a bullish bias, adding to the longs on yield backups,” says Braizinha.

Separately, support for the trade may also come from short-term seasonal factors. Deutsche Bank’s chart below shows August tends to be a good month for bond prices and falling yields.

Source: Deutsche Bank


S&P 500 futures ES00
are up 0.6% to 4,118 and Nasdaq 100 NQ00 futures
they are adding 0.6% to 12,996 as traders recover their balance after the last dip. The DXY dollar index
it is giving up some of the gains from the previous session, dropping 0.1% to 106.18. Gold GC00
is down 0.3% to $ 1,785 an ounce and Bitcoin BTCUSD
is climbing 1.6% to $ 23,379.

The buzz

PayPal shares PYPL
are jumping 13.6% in pre-market action after Payments Group revealed stock repurchase and cost savings programs, a new chief financial officer, and confirmed activist group Elliott Management had built a stake .

Investors are swiping left on Match Group MTCH stock,
down 20.9% after the owner of Tinder delivered disappointing results after the market closed on Tuesday.

Earnings reports on Wednesday included Moderna MRNA
and Under Armor UA
before the market opens. Ebay Ebay
and Qorvo QRVO
come after the closing bell.

US crude oil futures CL
they are gaining 2% to $ 96.32 a barrel, surpassing the five-month low, after OPEC agreed to increase production by 100,000 barrels a day.

US Economic Data for Wednesday: July’s ISM Non-Manufacturing Survey and June Factory Orders, both expected to be released at 10am Eastern.

Taiwan TW Stock Markets: Y9999,
Japan JP: NIK
and Hong Kong Hong Kong: HSI
they were more stable as regional tensions eased in the wake of House Speaker Nancy Pelosi’s visit to Taipei. Taiwan’s National Stabilization Fund has stated that it is ready to intervene in the market if necessary.

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The graph

Respect the corporate position, says BNP Paribas. Companies buying their own stock provide useful support to the market, and the graph below shows the repurchases announced at the highest levels in over a decade.

Source: BNP Paribas

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