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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Lost in the fog of "whale tales" and superseded in the news cycle by the Nasdaq's brush with a techn
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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.