Bond investors see brighter days

U.S. government bonds could breakout further after yields on the benchmark 10-year Treasury note ticked up to their highest since early June last week.

But, but, but: Strategists say this move is about an improving outlook for economic growth rather than just inflation.

What it means: Economic growth comes with inflation but for much of the year investors have been betting the massive increase in the U.S. money supply as a result of stimulus efforts from the Fed and Congress would deliver inflation that might not include growth.

• That led to a bonanza for gold, silver, Treasury Inflation-Protected Securities and other inflation hedges, and a decline in the dollar.
• But those assets have reversed much of their earlier gains of late and remained tied down in tight ranges while U.S. government debt yields have surged.

What we're hearing: There's a clear pickup that began after the first presidential debate on Sept. 29, as investors have bet on a Joe Biden victory and blue wave Democratic takeover of Congress that could lead to substantial government spending, including an infrastructure bill. But it's not all politics.

• It's about "a bounce in economic activity, writ large, expectations of a little more inflation from Fed policy and natural economic trends as well as those politically related issues," Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, tells Axios.

The intrigue: Yields on the 10-year note are even edging above their 200-day moving average for the first time since December 2018, Reuters notes.

Watch this space: Net short bets on the 30-year Treasury bond — which has seen yields jump by 19 basis points since Oct. 1 — reached an all-time high earlier this month, reflecting investors' bets that yields will continue to rise.

• “It may now be time to flip thinking on U.S. rates where instead of mechanically buying dips ... upticks in bond prices now need to be sold,” analysts at Citigroup wrote in a note to clients Friday.

Where it stands: Top Fed officials, including vice chair Richard Clarida and governor Lael Brainard, have suggested that the Fed could ratchet up its bond-buying program, especially longer-dated bonds, pushing up prices and reeling in yields.

• But analysts believe the Fed will stand pat if lawmakers can produce a fiscal spending package.
• "If long-term interest rates rose along with economic confidence and more supply from fiscal authorities, I don’t think the Fed would alter their bond-buying plan," LeBas says. "That’s what they want."