Bond Traders Dabble With Irrational Exuberance

History shows that betting against the bond market is a fool’s errand. There’s no shortage of smart people over the years who have prematurely called the end of the bull market that began in the early 1980s. And while the market hasn’t avoided some rough patches, with the Bloomberg Barclays U.S. Treasury Index posting relatively small losses in 1994, 1999, 2009 and 2013, there’s been nothing like the “bondageddon” predicted. Even so, it’s hard not to think that bond traders are a bit too overconfident these days.

Treasuries rose broadly Tuesday as a widely followed JPMorgan weekly survey showed that bond traders are the most bullish since mid-2016. That’s when the U.K. voted to leave the leave the European Union in a decision known as “Brexit,” fostering concern the global economy would be upended. At the recent reading of 17, JPMorgan’s so-called All Client Net Long index is well above the average of negative 3 since the onset of the financial crisis in 2008. Bond traders clearly feel the Fed is done lifting interest rates and that the next move may be a cut, and perhaps soon. The odds of a reduction this year have risen over the past two weeks to about 65 percent from 40 percent as inflation has slowed, according to data compiled by Bloomberg. Yes, inflation has slowed markedly in recent months, but it’s still hard to see a rate cut happening anytime soon with the economy having expanded at a 3.2 percent rate in the first quarter, wage growth beginning to pick up and a labor market nearing full employment. According to LPL Financial, of the 45 times the Fed has cut rates since 1950, only 12 came after a quarter with output growth of 3 percent or more. Plus, in many of those instances, leading indicators had signaled impending weakness, which is not really happening now. On top of that, the latest data out of the euro zone and China are encouraging. “We see plenty of evidence that solid U.S. fundamentals are intact even as the global economy struggles with trade and political risks,” LPL Chief Investment Strategist John Lynch wrote in a research note Monday.