The risk-off trade is popular again.
Here's why: That euphoria over the prospects for regulatory reform and U.S. growth is now being discounted by the market. Confidence in the government's ability to actually implement reform and effect change is fading ever since the administration failed to revamp health-care regulation. That has contributed to a weakened dollar.
Mounting geopolitical risks is another key driver of demand for long-dated Treasuries. President Trump's growing focus on foreign policy, and his recent actions with regard to Syria and North Korea, have investors increasingly on edge.
Guggenheim's CIO Scott Minerd said Monday the drop in yields and rising demand for bonds result from "[Washington] D.C.'s struggle to pass pro-growth policies and rising geopolitical/military risks."
Massive short-bet unwinding
According to Minerd, we could see 10-year Treasury yields drop to 1.5 percent "or lower" by this summer if this trend stays in place. That would amount to a 32 percent decline in rates from current levels, and the lowest yields we've seen since last summer.
Minerd isn't alone. DoubleLine's Jeffrey Gundlach had been calling for a drop in yields and a test of the 2.2 percent level since earlier this year. The unwinding of that massive short position has something to do with it.
"With investors piling on to a one-sided trade, an unwinding of these positions could only add to demand," reads DoubleLine's most recent report. "As investors began to take down short positions through March, we have also kept an eye on inflation as it appears to be peaking out over the month of April, especially as the base effects from energy begin to roll off."
The firm's prediction includes inflation, as measured by the Consumer Price Index, peaking around 2.9 percent before turning lower into the summer months, "a move that could also be supportive of lower rates over the near term."
What could push yields higher instead? A rate hike in June, if it's accompanied by strong GDP data, DoubleLine said. The Federal Reserve raised rates again in March, and the market expects at least two more rate hikes this year. It remains to be seen whether June will bring one of them — the market is currently pricing a 50 percent chance.
TLT tracks a market-weighted index of U.S. Treasury bonds with remaining maturities of 20 years or more. The longer-dated the bond is, the more sensitive it is to interest-rate hikes. TLT has effective duration of about 17.5 years.
The ETF has $6.1 billion in assets and is the biggest and most liquid long-term U.S. Treasury fund on the market.
— By Cinthia Murphy, ETF.com