Are Rates Responding To Decelerating Inflation Or War Possibilities?

1.)  RATES – 10, 20, 30 YR Treasury yields are all signaling oversold conditions within their bearish TRENDS.  That just means that while these rates are trending lower, they are at a spot where a bounce should not be surprising.  But, given the overall economic condition, these rates will likely resume their fall if we see a bounce.  The 10 YR could drop toward 3.94% before we see any bounce.  The 2YR is also still signaling rate cuts.  The Short-End (2YR) has already closed at lower lows vs. where it was during December, and the top end of the daily TRADE ranges is dropping alongside Treasury Bond Volatility.  Remember, low and decelerating bond volatility is good for all markets, not just bonds.  Rate-sensitive stocks, like Utilities and Housing, should benefit, although the Utilities sector (XLU) is quite overbought here.  I wouldn’t be chasing it with the potential for a rate bounce. The larger takeaway is that inflation is decelerating, and rates are likely responding in this bearish trend.

2.)  IRAN – Geopolitical issues come and go, and the one on everyone’s mind now is Iran.  Based on satellite data, military assets appear to be in place.  An armada like what appears to have been deployed would cost roughly $2 billion per month.  A monumental waste of taxpayer dollars if you ask me.  But does the US deploy capabilities like this merely to negotiate?  This is a monumental logistical undertaking that requires extraordinary coordination among nations.  Does this mean a US attack on Iran is imminent?  No, but it certainly seems like an increasing probability.  What does that mean for global markets?  Well, presuming there is an actual attack, which is impossible to know for sure, markets likely dip, which would likely be aggressively bought.  Yes, institutions would likely use that dip and fear to reposition heavily into equities.  Our systems don’t trade off geopolitical issues because they leave as fast as they show up.  We’ll watch how the models pick up the flows and adjust accordingly.    

3.)  VIX – Of course, if the above were to happen, we’d likely see a decent spike in VIX toward 25, maybe 30.  That would likely be a very large buy signal for equities as the crowd “panics.”  Right now, VIX is trading at 21.18, above the top of its trend range of 19.55, which doesn’t mean much other than traders trying to position for uncertainties, putting pressure on prices.  But, as always, one day does not make a market and things can turn fast.