Solid Fed day and solid rally in response yesterday… Now today, it’s not just a complete 180°, but a 180° plus more insult to injury as yields surge to new long-term highs. Money has flooded out of both sides of the market prompting discussions about “risk-parity” trades. For bonds’ part, there are definitely steepening trades (selling longer-term bonds more than shorter-term bonds) driving some of the weakness. Corporate bond issuance isn’t helping. Nor is the technical break of the 3.0% level in 10yr yields. Several large block trades have added to momentum.
There’s another way to look at things though, and that is through the simple lens of short-term, emotional reactions to key events versus the long-term, big-picture, logical implications. The centerpiece here is yesterday’s Fed announcement and press conference which was viewed as a bullish event both for stocks and bonds, largely due to the single comment from Fed Chair Powell on 75bp hikes being off the table.
Think about that though… What does it really matter in the long run if the Fed hikes by 75bps in one cycle vs 50bps and 25bps over 2 cycles? Very little… Moreover, the Fed enacted its balance sheet normalization plan in a way that just as hawkish as it might have been, even if there were some reassuring qualifications offered (such as the bullet point about ending normalization at a certain point in the future). This confirmation of hawkish monetary policy in the face of burgeoning global growth concerns AND the promise to do more if the data suggests stubborn inflation pressure is exactly the reason that bonds have been “repricing” for the past several months.
In other words, this morning’s market movement jives better with the big picture narrative and yesterday’s market movement makes more sense in terms of a tactical, “sell the rumor, buy the news” sort of trade. To be sure, all of this is revisionist analysis at this point, and we’re only talking about it because we’re forced to explain an unexpected selling spree. The point is that additional bond market pressure has been and continues to be the baseline. All we’ve ever had with respect to a yield ceiling is “hope.” We continue to wait for any hard evidence that it’s taking shape, and we’ve said for months that it could take months to materialize (and in any event, will require confirmation from inflation data).
Isolating 10yr yields now, today’s sell-off is still very much in line with the preexisting trend:
Source: Mortgage News Daily