Bond Rout Inspires ‘Delayed Taper Tantrum’ Banter

The FOMC event risk has passed.

That was one obvious explanation for Thursday’s equity rally in the US. At the same time, consensus is coalescing around the view that Evergrande doesn’t pose a systemic risk. Not even in China, let alone globally.

While the new Fed statement, dots and Jerome Powell’s suggestion of a relatively brisk taper, together made for a somewhat hawkish cocktail, I was quick to note on Wednesday that “all in all, September’s proceedings had an ‘as expected’ feel.”

There were no real surprises, and one could pretty easily argue that Powell wasn’t trying to telegraph a rushed pace for trimming bond-buying. “The middle of next year” (his improv timeline for completing the taper) could be construed as roughly consistent with market expectations. In short, there wasn’t anything that should have prompted additional selling in stocks.

“All-in, a ‘low surprise’ Fed cleared us of ‘event risk’ while avoiding any sort of hawkish rate shock,'” Nomura’s Charlie McElligott said Thursday.

That was before US yields decided to cheapen dramatically on heavy futures volume, re-steepening the curve after Wednesday’s FOMC-inspired flattening.

Traders described “one-way sellers from a variety of account types,” Bloomberg’s Edward Bolingbroke noted, adding that “as duration cheapened, rates volatility [was] well bid.”

10s made it through 1.40% (figure above), testing the 100-DMA, a line that’s held for three months.

Alyce Andres called it a “delayed taper tantrum.” I tend to doubt that characterization.

It’s not obvious (at all) why market participants who may have suddenly “woken up” to a hawkish Fed would be inclined to retrade the FOMC via a huge down-trade in the long-end.

BMO’s Ian Lyngen called that proposition a “big question-mark.” “The more willing the Fed is to combat reflation, the less bear steepening we’d anticipate,” he said.

“Ultimately, taking multiple steps closer to removing accommodation means tighter financial conditions that will moderate the economy down the road,” McElligott remarked.

That’s consistent with a bull flattener and a duration rally, the opposite of what transpired midday Thursday. In other words, Wednesday looked like a watered-down version of the “policy mistake”/ “growth scare”/ “market-doubts-the-Fed-has-the-guts-to-countenance-a-sustained-inflation-overshoot” trade from June’s meeting. So, basically an anti-reflation trade in rates.

What’s interesting is that, as Bloomberg picked up on, that wasn’t mirrored in equities. “Everything looks like it’s trading a steeper yield curve, except the yield curve,” Renaissance Macro’s Neil Dutta told Katherine Greifeld on Wednesday afternoon.

Fast forward to Thursday and you might suggest rates are catching up.

Lyngen posited a hodgepodge of bearish factors, including a seasonal, bunds (which sold off the most in six months, taking 10-year German yields to the highest since July), the notion that contagion from Evergrande will be limited and, of course, the ongoing surge in US equities.

One shouldn’t forget about the BOE. Gilts led the government bond selloff following a September policy statement which skewed hawkish. Bloomberg’s Sebastian Boyd flagged the selloff in fives. “The last time the yield on five-year Gilts rose more than 10bps in a day was back in March 2020, though a selloff like today’s is generally something you see about twice a year,” he remarked.

Lyngen summed it up best. Thursday’s bearish price action in Treasurys “is one of those classic moves that simultaneously has no obvious explanation and all the justification in the world.”