The pop-up in long-end U.S. Treasury yields of the past few weeks, following a similar occurrence in July, has caused quite a few subscribers to become uneasy about the narrative I write about earlier this year concerning my expectations for yields and mortgage rates to fall and attract first-time homebuyers back into the markets.
My expectations have not changed.
As I discussed this week in the column "Rest for the Weary: Economic Fundamentals Mandate Lower Bond Yields," the macroeconomic fundamentals dictate lower long-end yields, and I continue to believe they will decline to record lows.
The observations in that column are a continuation of the economic issues I've written about all year, and most specifically that the stimulative capacity of monetary policy has been exhausted because private-sector demand can't increase, because incomes are fully collateralized to servicing existing debt, and economic growth can now only come from fiscal spending.
Although the regular readers of my columns have probably internalized this logic to the point that it seems patently obvious because of how often I've written about it, this reality is just now beginning to set in with most of the financial markets and policymakers.
Bond market traders don't have the luxury of taking positions based on fundamentals, though, and in this market are extremely sensitive to anything that appears to potentially counter the logical progression of economic activity and what it implies about the trajectory for bond yields.
Those issues have included Brexit, the European Central Bank punting on more stimulus during its last policy meeting, the Bank of Japan talking about ways to force long-end yields up in Japan, and most recently, as I discussed in the previous column, Bill Gross and Jeffrey Gundlach saying yields have to rise.
In that environment, domestic macroeconomic fundamentals and even FOMC members' publicly offered assessments are rendered irrelevant, with the sole focus by each trader being how other traders will respond to those other immediate issues.
The proper, prudent and rational response is to sell bonds and, in the process, yields rise.
That action, however, has nothing to do with economic fundamentals. The goal is either to cut losses or game the immediate trend for profit; i.e. "shoot first and ask questions later."
Brexit is not a fait accompli, the ECB punting is not an indication of imminent growth in Europe, and the BOJ talking about forcing up long-end yields is equivalent to a dinosaur thrashing around in a tar pit.
The analyses and perspectives offered by Gross and Gundlach appear to be well grounded, and although I differ with some parts of the timing of each, I think they offer great points.
Bond traders, however, don't focus on the logic. What they hear is along the lines of "blah, blah, blah, yields have to rise," and respond by selling Treasuries and making the yields rise.
Later, from a safer position, the questions asked and considered will center on whether the move and the new level of bond yields comports with economic fundamentals and trajectory.
I remain of the opinion that they do not and that the trajectory for yields continues to be down with, at best, aggregate economic activity continuing to underperform the Fed's legislative mandate.
That situation can't change until fiscal stimulus is provided, and although Gundlach thinks such will be provided sooner rather than later, and put upward pressure on bond yields, I am of the opinion that it isn't politically viable without a crisis, as I discussed in the column "Fiscal Stimulus Package Will Happen; It's Only a Matter of When."
As such, I also view the increase in yields of late to be cyclical noise within a continuing secular bond bull market that will reassert itself soon.
By extension, I think the 15% decline in Hovnanian Enterprises (HOV) and the 8% decline in Beazer Homes (BZH) during the past week represent excellent entry levels for investors who thought they might have missed the boat.