After 3 days of carnage in US Treasuries, pushing longer-dated bond yields notably above US equity dividend yield - and following both Citi and Goldman reports that Trumponomics may be less inflationary than expected (and the yield surge is tightening financial conditions) drastically, longer-dated bond yields are dropping notably in the early Asia session. 10Y yields are down 8bps - the most since June as 30Y drops back below 3.00%.

The yield on the 10Y US Treasury note is now 12bps 'cheap' to the dividend yield from the S&P 500 - the highest since Dec 2015...

And as Bloomberg reports, Fed speakers this week are unlikely to be as hawkish as the market, which could dent market pricing and lead to profit-taking on rates and USD, according to Citi managing director of G-10 FX strategy Steven Englander.

Were the Fed to indicate that it thought three hikes were possible, we could see a lot more damage than we have seen till now, Englander writes in note.

Citi however expects a far more dovish tone given:

• Fed doesn’t know the nature of Trump’s fiscal measures that will be implemented, and they likely won’t be shovel ready
• It’s cognizant of Dollar Index strength as it approaches log-term highs of 100.33

Fed would rather react to any revival of “animal spirits” rather than anticipate them

Bottom line to Fed view is:

• FOMC will accelerate hikes if fiscal thrust takes economy into red zone, although where this zone lies is unclear
• Fed may allow inflation to run and thus recoup some of the prior inflation undershoot
• Fed won’t want to tighten prematurely and create a sinkhole for growth in 2017
• Fed will move judiciously until the nature of the stimulus that emerges and the timing of its impact are clear

As we detailed earlier, Goldman is less enthused about Trumponomics inflationary aspect...

• Following Donald Trump’s victory in the US presidential election, the focus now turns to the potential economic implications of his proposed policies. The November 12 US Economics Analyst used the Fed staff’s FRB/US model to analyse the consequences for the US economy. In today’s companion piece, we assess the potential global economic spillovers from the Trump agenda using our global macro model.
• Following the US simulations, we analyse four of Mr. Trump’s policy proposals, including fiscal stimulus, trade tariffs, restrictive immigration policies and a hawkish tilt in Fed policy. We first analyse the policies individually and then combine them into possible packages, including our own assumed policy outcomes.
• Fiscal stimulus has positive global spillovers, as stronger US demand boosts imports for foreign goods and services. Dollar strength reinforces the positive spillovers to DM economies with floating exchange rates, but limits the gains in EM economies. The spillovers to China, for example, depend on the extent to which the Renminbi appreciates with the dollar and the net effects are less positive for EM economies that rely heavily on dollar-denominated debt.
• The other components of Mr. Trump’s agenda (trade policies, immigration and Fed) have negative global spillovers as US inflation is higher and US growth slows. The growth drag is generally muted for DM economies with floating exchange rates but significantly negative for some EM economies (including China).
• Taken together, our analysis suggests that Mr. Trump’s policies might act as a modest drag on global growth. DM growth receives a brief boost from the fiscal stimulus but then weakens and spillovers into EM economies are negative throughout. Moreover, the risks around this base case appear asymmetric. A larger fiscal package could boost global growth moderately more in the near term, but a more adverse policy mix would likely act as a significant drag on world growth in subsequent years.

All of which appears to have sparked buying again in bond land as 30Y yield is back below 3.00%

While still relatively small compared to the surge in yields, this is still the biggest yield drop in 10Y since June...

The drop in yields could be a major problem for the exuberance in US financial stocks (which have run way ahead of credit)...

And perhaps it's time for US stocks to catch down to the world's reality?