BMO: Reserving Judgement On Establishment Of Trading Range

BMO note that "it's tempting to conclude that the low yield mark of 1.126% will represent the bottom of the trading range for the coming months - but we're reserving judgment at this point. If for no other reason than yesterday saw the final leg of July's duration-heavy supply and the subsequent bid is encouraging insofar as it hints that there is much less sticker shock associated with 1.25% upon the second visit. The parallels between used car and bond price inflation are not lost on us; even if their existence brings into question many of the market's core macro tenets. Needless to say, the disconnect between significantly higher than anticipated inflation and rallying Treasuries will remain a touchstone for the bond bears looking for a swift return to 1.75% 10-year yields. We're not in this camp per se; although even a range-trade allows for bearish episodes. Before leaning too heavily in favor of a bearish drift higher in yields from here, we'd like to get comfortably passed the event risk presented by next week's FOMC meeting, GDP report, and month-end. All else being equal, one should expect Powell to strike a more dovish tone than that echoed during the recent pre-taper phase. In general terms, the tapering timeline remains December announcement and Q1 rollout."

• "A dovish Fed will benefit 3s and 5s on confirmation that not only does the pandemic remain the biggest risk for the real economy, but it will also allow for an extended period of 'transitory' inflation before the Fed would ever be compelled to address higher consumer prices with monetary policy. Our biggest question is whether this drags 10- and 30-Year yields lower or if the confirmation of commitment to the new framework leads to an outright selloff on the longer end of the curve. In the event of the latter, we'd view any backup in yields are a buying opportunity ahead of month-end."