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‘We Disagree With Every Element Of This Narrative’: Why One Bank Doubts A Consensus Bond Trade

Lost in the fog of "whale tales" and superseded in the news cycle by the Nasdaq's brush with a technical correction, was an aggressive selloff at the long-end of the curve Friday. 10-year yields rose 9bps and 30-year yields 12 on the heels of an August jobs report that, at least on the surface, met expectations. Prior to Friday, the story of the week in rates was the unwind of the bear steepening impulse from Jerome Powell's unveiling of average inflation targeting. That unwind was itself partially unwound to close the week, as the 5s30s steepened more than 5bps. In addition to the jobs data, the market appeared to be doing some prep work (if you will) for next week's supply deluge, which includes 10- and 30-year reopenings as well as the expected seasonal tsunami of investment grade issuance. That overhang likely short-circuited the flight-to-safety bid which may have otherwise shown up Friday amid a second day of losses for stocks, which fell hard over the US morning before paring the worst of the slump. Note that September's IG slate comes on the heels of a record-shattering year for high-grade supply, as blue-chip US borrowers took advantage of the favorable conditions c
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1 comment on “‘We Disagree With Every Element Of This Narrative’: Why One Bank Doubts A Consensus Bond Trade

  1. Vlad is Mad says:

    With the market discounting rates on hold for the next 5-years, the main driver of yield curve shape is not Fed Funds, not rate expectations in the strip, but the long-end of term premium as well as the trade-off in the real yield / breaks relationship which is highly and unusually negatively correlated. The second variable delivered unchanged rates and sub -50 MOVE. It seems there will come a point in the near future where the correlation will naturally become less negative. If breaks and real yields are both rising, for whatever reason, the curve will steepen, equally if they are both declining the curve will flatten–this just seems overly obvious to me that you can try to find reasons within Fed policy or investor preferences to fill in the gaps, but I am not sure it is sufficient for Fed WAM to be the sole driver of the curve, its complicated.

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