US markets calmed down a bit Friday as gloved traders and investors sifted through the smoldering ashes of Thursday’s bon(d)fire.
The situation remained far from resolved, though. Yields fell stateside, and the curve bull flattened, but there was a palpable sense of lingering angst.
Bonds have become a source of risk and volatility, imperiling multi-asset portfolios and raising uncomfortable questions about central banks’ capacity to tamp down yields without explicitly declaring price discovery dead. How, for example, do you explain to markets that 1.50% is “unreasonable” for 10-year US yields or, even more absurd, that negative 70bps is unacceptably “high” for 10-year reals? Those are questions Fed officials will need to ask themselves in the event rate rise continues to be disorderly, as it was this week.
“The surge in volatility has been noteworthy following the prolonged period of suppressed vol that reflected the range-trading Treasury market,” BMO’s rates team said Friday afternoon. “Coming into 2021, one of our most frequently fielded questions was at what point in the year would the best opportunity to sell vol present itself [and] in keeping with the seasonal theme of bearishness in Treasurys in the early, and late parts of any respective trading year, Q1 and Q4 resonate as the periods during which vol picks up,” they added.
The onus is clearly on Jerome Powell to figure out whether and how to respond. So far, the Fed stands apart as countenancing the move higher in yields, while policymakers abroad are already pushing back.
“Over the past week, real yields continued to rise while inflation expectations declined, which is not a positive sign for the reflation trade,” SocGen’s Subadra Rajappa remarked. “While the Treasury and the Fed don’t coordinate their actions, the rise in yields is inconvenient and ill-timed,” she went on to say, noting “the pain” from Thursday’s already infamous seven-year sale.
For equities, the pain was most acute for tech. While the Nasdaq tried to recover Friday, it was still an awful week.
Nothing escaped completely unscathed. Both the S&P and small-caps logged weekly losses.
Secular growth will likely remain in the firing line until there’s some resolution to the “situation” in rates. The same is true for corners of the market seen as particularly frothy. It was a disastrous week for Tesla and for Cathie Wood’s flagship ETF, for instance.
The Bloomberg Dollar index jumped Friday, logging the largest two-session gain since April in the process. It’s sitting at a three-week high.
This was a particularly loathsome week for gold. Surging US real rates are Kryptonite for the yellow metal, which dropped nearly 3% on the week. That came atop last week’s similarly steep losses. For the month, gold fell more than 6%, the worst performance in four years.
Are we still supposed to believe this is the result of a “rotation” from gold to Bitcoin and not the result of a sharp increase in real yields? I’m just wondering because… well, because 10-year reals rose 40bps in February prior to Friday.
Gold’s malaise must be insult to injury to those who bought it expecting a Bitcoin-esque rally predicated on massive deficit spending in the US. So much for that thesis.
Speaking of deficit spending, Joe Biden’s stimulus plan was all set to move ahead Friday. There was just one problem.
Some Democrats are furious at the prospect of arcane Senate procedural rules preventing them from including the $15 minimum wage hike in the package. Biden has always said it would be a heavy lift, but Progressives simply aren’t prepared to stomach the notion that America’s lowest-paid workers are at the mercy of the Senate parliamentarian. Kamala Harris can override the ruling not to include the minimum wage measure, but that didn’t seem likely. The other option is to abolish the filibuster, but Biden isn’t particularly keen on that.
Alexandria Ocasio-Cortez is adopting a conciliatory tone — for now. “I feel responsiveness from the White House,” she said Friday, noting that “Progressives aren’t being iced out of these negotiations.”
I mention Ocasio-Cortez for obvious reasons. Biden (and Democrats more generally) need to appease her. That doesn’t mean holding up stimulus or shaking up the Senate to placate one, young House Rep. But it does mean acknowledging (tacitly, of course) that when they speak to Ocasio-Cortez, they may be speaking to a future president. You might safely laugh at that for another eight years. But centrist Democrats (and all Republicans) are scared to death of her. And that fear will grow over time as she gains experience. The more irritated she is, the more impatient she’s likely to become. And impatience could breed ambition. Establishment Democrats may want to short-circuit that by keeping her in the loop, so to speak.
Anyway, Bernie Sanders and Ron Wyden are looking at different options, including leveraging taxes to encourage companies to pay their workers more. “We couldn’t get in the front door or the back door, so we’ll try to go through the window,” Wyden explained. You have to appreciate the candor, even of you don’t like the idea or the methods. “While conversations are continuing, I believe this ‘plan B’ provides us a path to move forward and get this done through the reconciliation process,” he added.
Commenting Friday on Joe Manchin and Kyrsten Sinema, who don’t support the $15 minimum wage despite being (ostensible) Democrats, Ocasio-Cortez said “the fact that we have two people in this entire country that are holding back a complete transformation in working people’s lives, the same people who have held our country together throughout this pandemic, is wrong.”
That she feels comfortable publicly chastising two senators from her own party is remarkable.