From FT Alphaville:
When in bond rout doubt, Occam’s razor
So this could be the beginning of the end.
Or, alternatively, the bond price rout is a perfectly predictable response to…:
Here’s the US 10-year yield as a comparison:
But here’s the thing.
While it may seem reasonable to view oil’s rebound as inflationary in the longer run (amounting as it does to a tax on the economy that curbs consumer spending) — meaning higher oil prices can be justifiably construed as both bearish for bonds and bearish for equities — we’d argue you’d be wrong to think of it this way.
What the bond market seems to be missing is there are literally hundreds of US shale oil producers standing ready on the side lines just waiting for oil prices to hit $65 per barrel so they can start production.
That amounts to a proverbial flood of crude entering the market as soon as the break-even level is hit, with obvious repercussions for spot prices.
So, yes, there may have been a recent turnaround in the US crude stock accumulation picture, as this chart from John Kemp at Reuters shows:
But what the chart doesn’t show is all the additional stock — the so-called “Fracklog” — that’s sitting idle in the ground just waiting for an excuse to be slurped out. Furthermore, for those who thought fracklog can’t be extracted half as responsively as stored oil, our FT colleague Ed Crooks informs us that might be an error of judgment. Last he heard, it probably takes no more than a week or two to start producing sizeable flow from any of these uncompleted wells, in some cases, as little as five days.
If true, there’s a veritable US shale reserve station ready to compete with crude sitting above the surface in tanks.
What’s that got to do with bonds?
Well, any additional crude that hits the market will do so at the cost of a dollar transfer to shale producers, dollars which will either have to be reinvested in more crude reserve supply (deflationary) or have to be parked in, well, safe assets of some sort....MORE
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