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US 10y yields too low unless global PMI manufacturing plunges

A month ago quite a few market participants were actually despondent, wondering if anything interesting at all could happen this year. Since then we have seen an almost complete wash-out to various reflation trades, owing mostly to the virus. 

The news flow on the virus front has however turned less alarming, we have seen a rising G10 surprise index and central banks are throwing liquidity at all problems. All of this has helped reflation trades start to perform a tad again. 

Global PMI must drop quite a bit to motivate US 10y yields at today’s levels, so a truckload of bad news has already been priced in, in the rates space.

Aside from the spread of the virus (and we have to admit the rumor mill is running wild), the biggest question facing investors at present is probably at what point central banks will start caring about frothy market conditions.

Dallas Fed chief Kaplan thinks the FOMC should “beware elevated valuations” and partly blames the Fed’s massive balance sheet growth for recent asset price inflation

In contrast, Minneapolis Fed’s Kashkari sees no link between the balance sheet and asset prices whatsoever. We believe both excess liquidity and the size of the balance sheet matter, at least for psychological reasons.

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