Today April 6 the yield on the 10-year Treasury is down again–to 1.65%, a drop of 5 basis points. After looking like it was on a short path to breaking 1.90% and threatening 2.00%, the yield on the 10-year Treasury has been stuck in a range of 1.60% to 1.70%. And that calm in the bond market has been a key to taming fears that inflation was about to race higher and has helped power the stock market’s most recent rally.
But a significant number of bond traders are betting that the calm won’t last. Short interest in the $14 billion iShares 20+ Year Treasury Bond ETF (TLT) has climbed to about one-fifth of shares outstanding, the highest since early 2017, according to IHS Markit. Bearish bets, Bloomberg reports, have risen from just 7% at the start of 2021. So far in 2021, the ETF is down 13%.
Cash flows out of the ETF have echoed rising levels of shorts. Investors have pulled almost $2.6 billion from the iShares TFT so far in 2021, putting the fund on track for the worst year of outflows since its inception in 2002. Other long duration bond EFTs have seen similar outflows.The $40 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) posted its biggest one-day outflow on record last week.
These bets are coming as actual bond volatility has dropped. The ICE BofA MOVE Index, a gauge of U.S. bond volatility, has eased to roughly 62 from a peak of 76 reached in late February, the highest level in 11 months, according to Bloomberg.
It’s not clear that these bond traders are waiting on any specific event to cause bond volatility to spike and bond yields to climb. It instead looks like they’re better on the general trends of higher economic growth, more stimulus spending, and (maybe) some actual inflation (or at least anecdotal evidence of glitches in global supply chains) to move bond volatility back to February levels.
The return of a trend toward higher bond yields would be a major challenge to stock prices now at all time highs.
