While stocks continue rising to all time highs on the back of a handful of tech stocks, the tension below the bond market grows, only not in the direction that an all time high in the S&P would suggest. As RBC macro strategist Mark Orsley writes in a Friday note, "I am finding it increasingly difficult to see a near term catalyst for UST’s to sell off.  In fact, almost all indicators I watch are flashing a warning that a breakdown in yields (longer end) is increasingly probable" and urges readers to "position/protect for a move to 2.00%."

Orsley lays out 4 reasons why any new bond shorts may soon be forced to cover, again.

1. Technicals -> two head and shoulder formations point to lower yields.Target of 2.05% on the Feb/March formation, and if 2.17% gives way, the H&S from April/May targets 1.95%.Notice the MACD starting to trend lower…

2.Reflation -> the Dollar (blue) is indicating the “reflation” trade is over and signaling a coming correction in 10yrs (black) to sub 2%...

3. Correlations -> UST brethren’s are breaking down: Aussie 10yr rates (blue) have broken down. Correlation points to 2% UST 10yrs…

Gilts (blue) motioning the same…

4. Economic data disappointing -> Bloomberg surprise index (blue) points to 2%...

On an anecdotal basis, equities have completely erased last week’s brief meltdown and have actually broken to new highs.Yet rates have not recovered the same way.  Something is wrong here and in conversations with clients, the concern is the Fed is now talking down inflation prospects.Recall this blurb from the minutes as an example: “a few Fed officials concerned progress on inflation goal slowed.” Additionally, participants are becoming increasingly worried of a policy error (tightening into a slowdown).

That is a notable shift as we head into the June FOMC meeting in a couple weeks.It is worth noting with the OIS market 80% priced for a hike that the last two hikes in this “cycle” has seen yields subsequently decline….

Orsley's Bottom line:

"It may seem like a no brainer to short at these levels into a Fed hike (at least this time the market isn’t going in at the yield highs), but all the above indicators should serve as a warning to bond bears. Despite cleaner short positioning, the pain trade still remains lower yields."