It all started in February, when we first reported that something unexpected had happened: for reasons that were at the time unknown, the global credit impulse had unexpectedly tumbled, turning negative, a move which we predicted would result in a steep slide in the "soft" economic data, end the "reflation" optimism and unleash a wave of dovishness from the Fed.

Then, two months later when the reflation trade was officially over, in early April the culprit for this sudden collapse in global growth momentum was identified: China, which together with the price of oil, had been the only catalyst for the global reflation trade since the "Shanghai Accord" in February 2016, and had seen its credit impulse crash at the fastest pace since the financial crisis, dropping to a level not seen since 2010. 

Fast forward to this weekend, when in his latest fixed income weekly report, Deutsche Bank's Dominic Konstam - who two weeks ago flipped back from being passionately bearish on rates and TSYs, and a supporter of the reflation trade, to anticipating much lower yields and a slowdown in the economy - writes that "It was good while it lasted."

What he is referring to is both the so-called "bear market" in bonds as well as global growth momentum, and in taking a page from the second derivative playbook we have focused on over the past two months, he expects it to decline sharply now that US excess liquidity has reached a downward inflection point, and as a result for the foreseeable future monetary policy will be a headwind: "historically, the peak in G3 yields has coincided with peaks in output momentum. It would not be unreasonable to expect at least a 50 bps decline from peak to trough in G3 yields following a peak in yield momentum."

Below, he explains why his latest advice to rates traders is to "Sit back, relax, the bear market in bonds may be over."

For those who wish to recreate their own excess liquidity tracker at home, which together with Chinese credit impulse are arguably the two most important leading indicators in a time when credit creation is the only thing that matters, here are some further details.

Finally, based on both empirical data and concurrent indicators, the correlation between turning points in output momentum and yields is well established. The charts below show various metrics for G3 yields, US yields and 5y5y yields versus both nominal and real output momentum.

There are about 15 episodes going back to 1992 which are all coincident with the shift in direction of yield momentum. For G3 yields, there are 59 months where yields are at least one standard deviation higher than a year ago and 39 months when yields are at least 2 standard deviation higher than a year ago. In the former case the subsequent move in yields averages -56 basis points and in the latter case, -61 basis points. The last major shift in momentum was 2014 after taper tantrum. In the latest episode there has been a 1 sd increase in yield momentum for March-April, 2017. It would not therefore be unreasonable to expect at least a 50 bps decline from peak to trough in G3 yields – if Japan doesn’t move, then depending on the move in European yields, this would be disproportionately larger for the US.

In short: the gamble launched with the Shanghai Accord in February 2016 which prevented a global bear market, namely the global reflation experiment is once again dead - thank China and central bankers who had hoped to hand over monetary policy to Trump's failed fiscal policy. The market just doesn't know it quite yet.