Big, ugly morning for bonds (and stocks)
Solid day from the Fed and solid rally in response yesterday… Today is not just a full 180°, but a 180° plus insult to injury as yields hit new long-term highs . Money poured in from both sides of the market, sparking talk of “risk parity” trading. For the bond side, there are certainly steep steepening trades (selling of long-term bonds more than short-term bonds) which explains part of the weakness. Issuing corporate bonds does not help. Nor is the technical breakout of the 3.0% level of 10-year yields. Several large block trades added to the momentum.
There’s another way to look at it though, and that’s through the simple prism of short-term emotional reactions to key events versus long-term logical implications. The centerpiece here is yesterday’s Fed announcement and press conference which was seen as a bullish event for both stocks and bonds, largely due to the Fed Chairman’s comment alone. Powell on the 75 basis point hikes being irrelevant.
Think about it though… what does it really matter in the long term if the Fed increases 75bps in one cycle versus 50bps and 25bps in 2 cycles? Very little… Moreover, the Fed has implemented its balance sheet normalization plan in as hawkish a manner as it could have been, although some reassuring caveats were offered (such as the chip on the end of standardization at some point in the future). This confirmation of hawkish monetary policy in the face of mounting concerns over global growth AND the promise to do more if the data suggests continued inflationary pressure is exactly why bonds have been ‘repriced’ in recent months. .
In other words, this morning’s market move fits better with the overall narrative and yesterday’s market move makes more sense in terms of tactical trading, “sell the rumour, buy the news”. Of course, this is all just revisionist analysis at this point, and we’re only talking about it because we’re compelled to explain an unexpected selling spree. The fact is that the additional pressure in the bond market has been and continues to be the baseline. All we’ve ever had when it comes to a performance cap is “hope”. We continue to await any hard evidence that this is taking shape, and have been saying for months that it could take months to materialize (and in any event, it will require confirmation of inflation data).
Now isolating the 10-year yields, today’s selloff is still very much in line with the pre-existing trend: