Earlier this morning, we noted that it’s not a foregone conclusion that yields will rise as the Fed hikes.
There’s certainly an argument to made that yields will fall (like they did after the last two hikes). You know, rate differentials making US paper relatively attractive and such.
And then there’s the (still) massive Treasury short hanging over the market. Here’s what we said this morning:
One thing to note is that with rate differentials already wide thanks to policy divergence, a hike might well stimulate demand for US paper, putting a bid under the market and driving yields lower, not higher.
And my, oh my – if that happens and all of the shorts in the belly of the curve have to cover, it would be quite the spectacle.
And here’s what former FX trader Mark Cudmore said earlier this week:
This isn’t an environment that supports much higher long- term yields. Add in the context that speculative short positions in Treasuries remain near record levels and it appears to be a market ripe for a squeeze.
Well another former FX trader ain’t buyin’ it. Below, find the latest from Richard Breslow.
Well, it’s probably a stretch to say the next installment in the Fed’s tightening cycle is finally here. After all, it was only a couple of weeks ago that this foregone conclusion wasn’t even on the market’s radar. The abrupt about-face was jarring and out of character in its timing, but I like the lack of overbearing hand-holding.
- It’s about time that forward guidance doesn’t have to mean as far as the eye can see. Is the Fed behind the curve? Are they letting the economy run hot? Not to any dangerous extent. But that doesn’t mean it’s not time to start getting on with things and make some faster progress toward the still very-low levels that might approximate the neutral rate
- Unfortunately, the market will still be fixated on the notion of whether it’ll be a dovish or a hawkish hike. We’ll get a hike, most likely more upbeat projections and assurances that if things keep evolving as they have and according to forecast there will be opportunities to do more. The Fed’s thinking three would be nice this year. The market is pricing less than that. Guess what? They’re unlikely to say they were only kidding
- But you’re not going to get some blanket pre-commitment, data-dependency didn’t die. You’ll also hear from a committee that’s a lot less afraid of making a mistake. If that’s not good enough for you, than your spirit may be permanently impaired
- Is the economy firing on all cylinders? No. But it’s doing well enough to justify and handle rates that don’t imply crisis. Yesterday’s release of NFIB Small Business Optimism showed it’s holding at levels not seen since 2005. It doesn’t get a ton of attention but it’s soft data that can translate into hard wage and, yes, productivity increases
- Active traders are short bonds. I’m warned, therefore, to be careful of some massive rally. I’m skeptical. A market of this size will require a change of perceptions to be bullied for more than a very short amount of time by some short- covering. If people begin to think 10-year Treasuries are going north of 3%, do you really think there aren’t enough longs to fill in the bids?
- Crowded trades may indeed have structural buffers built in, may even have short-term corrections from panics, but there’s no immutable law that says they can’t work if they’re right