Here we are, UK referendum day and markets seem all but certain that the “remain” camp is going to ultimately prevail. The latest polls showed the “leave” camp trailing headed into what’s turned out to be a wet day of reckoning in Britain, where “torrential” rain forced some polling stations to close.
We’ve seen the predictable risk-on trades working as the pound rallied, the yen sold off, crude jumped, gold fell, and stocks rose from Tokyo to London to New York (with the exception of the SHCOMP). Here’s USDJPY and USDGBP…
...and here’s crude and gold…
Needless to say, if there’s some kind of surprise this evening when the results start coming in from London, a lot of folks are likely going to be caught wrong-footed unless some of these moves reverse course over today’s session.
In any event, you can probably guess what US Treasurys are doing:
That’s 10-year futures and TLT, the iShares 20+ Year UST ETF. It’s a risk-on day, so they’re obviously falling. But recall what Deutsche Bank said last week:
“While this is an important issue we doubt regardless of the outcome that the inherent uncertainties as regards the global economic outlook will be resolved. It is tempting to consider the recent correlations and suggests that on Remain 10s might retrace to over 1.75 and on a “Leave” they might rally through 1.35. However the reality is that the uncertainties around the vote’s implications are as much symptomatic of the underlying challenges facing the global economy as anything else. A Remain doesn’t forever inhibit lower yields – and therefore would be a good buying opportunity.”
In other words, while a “leave” vote might make things worse, a “remain” vote won’t make things any better in terms of the rather dour outlook for global growth and trade. A “remain” vote also won’t clear up the FX ambiguity that persists in China and bedevils markets on a near daily basis nor will it do anything to ameliorate the myriad geopolitical landmines that still litter the current investing landscape (e.g. the US presidential election).
So, if we get a selloff and the 10-year does indeed sustain a bounce above 1.75, it might be time to back up the truck because between all of the uncertainty that pervades global markets (don’t forget, we’ve got a Spanish election coming up as well), and an FOMC which, to let St. Louis Fed chief James Bullard tell it, should only look for one rate hike in the next two-and-a-half years, one can reasonably expect yields to head back lower once any lingering “remain” euphoria wears off. Here’s where we stand now:
And here’s some of the analyst chatter out this morning via Bloomberg:
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Any selloff toward top end of 1.70%-1.75% range will be well-supported as underlying domestic economic concerns aren’t Brexit-related: RBS’s John Briggs
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View back-up in yields as a buying opportunity, particularly as 10Y approaches 1.80%, given Yellen’s dovish testimony along with relatively high-yielding govt debt and continued softening of inflation expectations: Seaport Global’s Tom Digaloma
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U.S. rates discount 75% of recent payroll decline, 90% of FOMC outcome; no visible catalyst for upside break in stocks; commodities not flashing inflation warnings, buying bonds here is the smart move: FTN’s Jim Vogul
There are other reasons to be bullish on US paper. Notably, yields look attractive on a relative basis. Have a look at the following from Deutsche:
(Chart: Deutsche Bank)
As noted above, you can trade this pretty easily with TLT, but it might be wise to wait until the results are in from the UK.
Sure, if there’s a surprise “leave” bias, then USTs will rally and you’ll have missed some of the upside, but on the other hand, if the market is right and “remain” prevails, you’ll likely be able to get in at an even more attractive level.
