“In a crisis you’re going to sell what you have, not what you want to”, TD’s Priya Misra said Wednesday. “This is not a normal functioning market”.
No, no it’s not. She was referring to the apparent selling of bonds in the absence of anything else liquid to sell.
Obviously, Treasurys have been bid to infinity lately as the safe-haven appeal and expectations of lower rates reignited 2019’s “duration infatuation”, which hit something akin to peak insanity late last week and especially on Monday, when 30-year US yields rallied as much as 59bps intraday, the most ever.
“In a week that has already been record-setting in financial markets by any number of measures, the moves in the 30-year US Treasury bond stand alone as jaw-dropping”, Bloomberg’s Brian Chappatta wrote Tuesday, marveling at the wild ride and rolling out a list of factors which likely contributed to the unprecedented action.
Have a look at the intraday range in 10s on Wednesday:
Why would previously bulletproof bonds sell off on a day when equities plunged into a bear market? Well, as alluded to above, folks are selling what they can sell, especially positions that are profitable and some semblance of liquid. It’s reminiscent of February 28, when the relentless rally in gold paused as investors were effectively forced to liquidate some of their holdings, presumably to cover large losses in other assets.
The footprints of this showed up in disconnects between cash versus futures on Wednesday, a session defined by near incessant chatter around basis widening and myriad dislocations. Based on the nature of that chatter, there will likely be some amusing anecdotes over the next couple of weeks. In fact, Cameron Crise insisted that one of the string of blog posts he delivered Wednesday was all the rage among his fellow commuters:
Anecdote alert: just saw a guy on the train in the row in front of me reading one of my "RV is imploding" MLIV posts and copy the chart for his mates on WhatsApp. #thepainisreal
— Cameron Crise (@5thrule) March 11, 2020
It’s not clear which post he was referring to (his digital pen was busy throughout the session), but the general flavor is captured in this excerpt:
This comes at a time of significant distress for fixed income relative value traders, who’ve seen all manner of basis trades — futures basis, invoice spreads, swaps spreads and even butterflies — become substantially more volatile, exhibiting the same sort of behavior we observed in 2008 and 1998. There are some real horror stories right now, that much is clear.
In any case, you get the idea. Things are getting dicey, positions are getting liquidated and, ultimately, that manifested in one of the single worst days for stocks + bonds (if you will) going back nearly two decades.
Of course, this is a wholly simplistic visualization, but it gets the point across (you’re looking at the 8.57% combined plunge on the right-hand side – that’s Wednesday):
Unfortunately, that could well indicate a dreaded risk parity deleveraging moment is nigh, or it could just mean that folks need to raise cash for margin calls and redemptions.
Meanwhile, the iShares TIPS Bond ETF is in the midst of a god-awful three-day run that now totals some 7%.
Again, the problem is liquidity and generalized market dysfunction.