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  • Noel Smith & Leo Capalleja

Three Reasons to be Bullish on Bonds

Is inflation actually transitory? Is the reflation trade done? In this brief 'show and tell' we give you three reasons that make a bull case for bonds.

Flattening Term Structure

Bonds/Notes have been rallying. The Eurodollar Futures curve has flattened.

Source: Bloomberg

Commodity Prices

Lumber as well as other commodities have come off of their recent highs. Lower commodity prices tend to lead lower interest rates.


Used Car Prices

Used car prices, a significant component in calculating CPI, are starting to come down. This can be seen below with the Manheim US Used Vehicle Value Index. Manheim is the largest wholesaler of used automobiles. So this index can be thought of as a representation of the wholesale prices paid by used car dealerships for their inventory.

Source: Bloomberg

The CPI calculation does not use these wholesale prices but rather the retail prices paid by consumers, with data provided by JD Power below. Note how Manheim numbers are starting to come down while JD Power numbers have not yet started to come down.


As with many markets, wholesale prices will tend to lead retail prices. Observing this pullback in wholesale prices, we expect to see retail prices decline in the short term. This will further soften CPI, applying downward pressure on rates, meaning upward price pressure for bonds (10-year Notes/Bonds price trades inversely to interest rates).

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