Treasuries had a persistently strong long-end-led bid through the day Wednesday to end with a substantial bull flattening rally that was futures led and left our desk and most clients puzzled it seemed about just what was going on. Trading volumes remained light, which may have made an exaggerated move easier, with our desk seeing some buying led by foreign real money investors but mostly only once the rally was already well advanced. There was speculation about perhaps some sort of asset reallocations going on, as the futures-led long end gains were mirrored in modest weakness in stocks (S&P 500 -0.6%) and credit (IG CDX index +0.5 bp), a larger pullback in oil (-4%), and a significant turn back higher in the dollar (+0.6% on the broad TWDI we estimate). Whatever specifically was going on Wednesday, there seems to be a lingering underlying bias towards a flatter curve that’s reasserted itself after a temporary reversal in response to the Fed’s dovish shift, and the nominal curve’s resumed bull flattening has been accompanied by resumed weakness in TIPS inflation breakevens the past two days that accelerated Wednesday. While long end led in absolute terms, front end gains were about as strong in relative volatility adjusted terms notwithstanding a better than expected new home sales report (+2% to 512,000) and hawkish newswire headlines from another regional Fed president, St. Louis’ Bullard this time. Near-term Fed pricing in futures moved back down to less than 50/50 on a June hike, and the path of short rates in coming years flattened back down moderately in line with the flattening in the Treasury curve. The more dovish near-term Fed view (though not the flattening and weakness in inflation breakevens) was a lot more in line with Bullard’s tone and what he actually said in his interview on Bloomberg television than what the editors picking the headline flashes and authors of the written Bloomberg story that followed the appearance chose to highlight.
