Dysfunction Junction

Last week’s bond selloff puts the spotlight on rates in the week ahead.

Although some described a “delayed taper tantrum,” I expressed doubt about that characterization. There were a number of factors in play when the move accelerated on Thursday, not least of which was the BOE’s hawkish tilt, which came just hours after the Norges Bank hiked rates. It’s also likely that some folks took profits on flatteners, after the 5s30s tightened inside of 94bps post-FOMC.

“We can talk all we want about it being a ‘delayed taper tantrum’ and there was a TY ‘short gamma’ dynamic at play below 132.5 into expiration, but my colleague Darren Shames I think had the most rational take of all,” Nomura’s Charlie McElligott said, on the way to quoting Shames.

“FWIW, the last two 10-year auctions and the 20-year auction are all under water now [and] we’re also north of the 1.91% stop on the last 30-year auction,” Shames said, adding that “all of this supply saw robust end-user demand [and when you] throw in a substantial amount of IG supply in September and the duration effect there (assuming its not all hedged-up), a lot of purchases are now under-water at these levels.”

Whatever the case, yields were higher (figure below). “A bearish repricing during October is very much in keeping with our view that investors will attempt to redefine the upper bound of the trading range and with 1.42% 10s now successfully breached, the next target range is 1.55% to 1.60%,” BMO’s Ian Lyngen and Ben Jeffery remarked.

The week brings a hodgepodge of new fundamental inputs as well as supply. Durable goods, the Dallas Fed, home prices, Conference Board confidence, the final read on Michigan sentiment, pending home sales, claims, ISM manufacturing and personal income and spending make for a crowded docket. A compressed auction cycle brings 2s and 5s on Monday and 7s on Tuesday.

The list of Fed speakers is comically long. The market will hear from Evans, Williams, Brainard, Evans again, Bowman, Bostic, Bullard, Bostic again, Williams again, Bostic a third time, Evans a third time, Bullard again, Harker, Harker again and Mester. If this is a secret society of conspirators (as Fed critics are fond of insisting) they sure do a lot of talking. (“I wonder about you sometimes, Henry. You might fold under questioning.”)

Speaking of questioning and people who might fold under it, Powell will be interrogated by the Senate Banking Committee (it’s a CARES Act review). But don’t worry, Yellen is participating too. She’ll take the hard questions.

While lawmakers will grill Yellen Tuesday, she’ll grill lawmakers all week. Treasury is still trying to convince Congress that a technical default on the nation’s debt is a bad idea. Regular readers doubtlessly know how I feel about that situation. It’s absurdity squared. Or cubed.

Without delving into the semantic debate about what Treasury bills, notes and bonds actually are (they’re not properly “debt”), suffice to say the US can’t involuntarily default. That’s a literal impossibility. I assume that’s obvious to all market participants, even if not to the general public.

The US can only default voluntarily, which is a euphemistic way of saying America’s increasingly capricious ruling duopoly might decide to throw you, me, markets and the entire global economy under the proverbial bus out of sheer spite for each other. Only to turn around and fix it posthaste, commensurate with the severity of the market reaction. That’s all there is to the story. There’s no utility in editorializing around it any further.

Meanwhile, Democrats will likely avert a government shutdown with a stopgap bill that doesn’t include a debt ceiling increase. “We will have a CR that passes both houses by September 30,” Nancy Pelosi told at a press briefing late last week. Again, this charade has become so absurd over the years that a quick lament suffices. America has no functioning government to speak of, and hasn’t for years.

As for Joe Biden’s fiscal agenda, Democratic infighting is proving to be a bigger obstacle than Republican recalcitrance, an entirely predictable outcome given Joe Manchin’s veto power. The future of America’s social safety net hinges on a guy from West Virginia who mattered so little the last time Democrats held the White House that Barack Obama called him just three times in eight years.

Once again: America has the trappings of a functioning government, but a quick look under the hood reveals near total gridlock, which in turn fosters still more public distrust, worsening societal divisions and eroding faith in democracy itself.

If there’s an argument for higher Treasury yields, maybe that’s it: If I have to own an interest-bearing version of a currency issued by a country without a functioning legislature, maybe I want more than ~1.5%.

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6 thoughts on “Dysfunction Junction

  1. Here is the rates connundrum from my perch. When you shift towards tightening, and tapering is tightening, you might expect risk premium levels to head lower, rate hikes in the curve to build, pushed shorter, and some clarity on the eventual duration of the post-taper rate hike cycle. This is all things that point to a flatter curve. As for the steepening argument, post debt-ceiling expansion or suspension supply is coming, which will be considerably higher than QE purchases, which sort of makes a re-run of Q1, when yields went up, also we are entering a period of weaker central bank purchases from seasonality and then it appears as if domestic banks are slowing their purchases which adds up to a situation where the household may sensibly buy the supply but not at the current price. Which theory wins out is going to be intersting to watch. On the first point, flattening occured in the previous taper or whenever the Fed takes their foot off the pedal. Personally, I am going with the second “supply” argument, but its a close call. If true, expect higher real yields and a stronger dollar.

  2. “America has no functioning government to speak of, and hasn’t for years.” You got that right. At my age, after watching this charade for the last 40 years, and especially lately, it is clear that most Americans don’t actually want a government at all because any rules these folks might make somehow impinge on everyone’s individual liberty. We have been taken over by the loud “well it’s my right ….” crowd. There no longer is a countervailing “it’s my responsibility …” crowd. Glad I’m closer to the end than to the beginning.

    1. Mr. Lucky, you’re making an argument that these people are just selfish to the point of destruction. And you may be correct. But, I wonder if it’s not that they are hellbent on destruction for “freedom” but rather they just want the government to work for them and only for them. And this is how they think they will achieve it. It’s a fear-based thing…if I am right.

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