A Bit Of Chaos Never Hurt Anybody

The post-Fed trade was somewhat chaotic, but one familiar theme was easy enough to discern: The long-end rallied and so did big-cap tech.

Treasurys bull-flattened rather dramatically Thursday, with 30-year yields falling as much as 16bps at one juncture, catalyzing the largest two-day 5s30s flattener since the bond market fireworks that accompanied the initial pandemic panic ~15 months ago. Traders cited stop-outs in steepeners and carry trades.

As Bloomberg’s Edward Bolingbroke noted, the two-day, ~20bps flattening impulse was on par with the February episode that accompanied the infamous 7-year auction debacle (figure below).

“Reflation trades suffered a significant setback after the Fed delivered a hawkish message at the June FOMC,” TD said, in a trade update. “This more hawkish message has led to a significant paring of reflation trades, with short covering exacerbating the moves,” the bank added, in the course of exiting their 5s30s steepener.

With the reflation trade on the back foot (commodities suffered mightily) and long-end yields in free fall, tech was resurgent, outperforming by a country mile (simple figure below).

Remember, the FANG+ index is now a “bargain” at “just” 47X.

Given the curve, it’s no surprise that banks were a disaster Thursday. The index fell nearly 5%, its worst day since early November.

Amusingly, the rout came after investors plowed some $1.7 billion into bank ETFs on Wednesday.

This is all likely to be quite messy for some time. Thursday’s action in the curve was particularly vexing. “Treasury positioning after the FOMC… is confusing everyone I talked to on the Street,” Bloomberg’s Vincent Cignarella wrote.

“It feels as though the Fed has moved to a post-COVID policy framework,” said SocGen’s Kit Juckes. “The timing of cuts in asset purchases, and of rate hikes thereafter, will depend on how the data play out [and] that should make markets a bit more volatile, as we will get back to watching the data more closely, rather than fixating only on a handful of major data points.”

If you thought Thursday’s trade was confounding or a bit haphazard, do note that Op-Ex looms with a big gamma drop-off opening the door to a wider distribution of outcomes thereafter. “This is why we’ve been pounding the table on this particularly enormous quarterly Op-Ex print, because we’re in the process of working through a precipitous drop in both $Gamma and $Delta around this serial ‘quad witch’ expiration, which in isolation leaves us susceptible to a much wider trading distribution coming out,” Nomura’s Charlie McElligott wrote.