From the early days of the pandemic, one of the most important realities to consider was that of the eventual recovery, both from the most abject phase of the pandemic itself and for the economy. Both have taken a few twists and turns, but we can still pick out the underlying trend amid the noise.
Before examining the bigger picture, let’s start with the 2nd half of 2021. Yields moved lower as summer began, largely because they were oversold after exploding higher in Feb/Mar (vaccines + politics + declining case counts). The delta variant accelerated the drop in rates, ultimately returning 10yr yields just under 1.13%.
After that, there were 2 key impulses in the market during Aug/Sep. One was a cautious, steady march back toward higher rates due to plateauing case counts. The other was lingering uncertainty over plateauing case counts (driven, in part, by the effect of Labor Day on covid reporting as well as implicit risks in subsequent weeks).
By 9/22, a few things had happened. Case counts continued to ebb and the Fed formally opened the conversation on tapering asset purchases. The net effect was an obvious jump up and out of the cautious trend (see the “Fed” note on the chart). When falling case counts stalled, so did the bond market sell-off. Then when Omicron hit the news, yields improved once again, but not nearly as much as they had in the Summer (heavy resistance below 1.42%).
Without the Fed policy changes or the Omicron surprise, we could hypothesize that yields would be on the same slow, steady trend marked by the yellow lines. What happens if we look at the same trajectory in the bigger picture? The following chart simply extends the bottom line from the chart above. I wouldn’t call this a perfect match, but it’s close enough to earn a label as the general slope of recovery.
The “yeah buts” are the aforementioned forces pushing back in the other direction (oversold bonds, delta, omicron). Without new “yeah buts,” the base case is for the slope of recovery to continue until it dies of old age or simply runs out of steam for technical reasons (which, admittedly, is pretty much just a more complicated way of saying “dies of old age”).
As for now, we’re smack dab in the middle of the two trends. It’s a thinly-traded, late-December Thursday with no major econ data. And there’s no chance of a definitive verdict on omicron this week. Small-scale volatility is always possible inside these broader periods of indecision. Wednesday’s sell-off pushed the boundary of our definition of “small-scale,” but that’s always a risk this time of year. Bottom line: we’re still waiting another week or two before looking for more significant market movement and spending much energy assessing its implication for bigger picture trends.