The bond market has the look of a top

Yesterday is beginning to look like the last gasp for bond bears. One of the most-crowded trades in the world is short-bonds — the classic widow maker. It finally paid early this year but 10-year yields have fallen to 2.80% from 3.50% a month ago.

Yesterday, 10 years looked like they might rise again on the breakout of a consolidation but there was a quick reversal intraday and they’re sinking now. Aside from recession worries and the belief that will slay inflation, I can’t offer a great explanation for the drop.

What I will note is that this is starting to look a lot like a head-and-shoulders top with a target of 2.0%. The May low of 2.70% will need to break to confirm it but more signs of the economy and inflation rolling over could cause a sharp short-covering rally, especially as international investors holding JGBs and bunds reach for yield.