The hyperbole flowed freely Monday as the worst global bond rout in modern history accelerated.
Two-year US yields rose as much as 14bps, extending an inexorable rise that one Bloomberg commentator called “literally parabolic.”
The move compressed the 2s10s, which has a date with inversion, just like the rest of the curve. Monday’s move looked extreme — excessive, even. It was faded, but it could reassert itself at any moment. The figure (below) depicts the rapidity of the selloff in shorter maturities.
“This is starting to look dramatic,” Bloomberg’s Eddie van der Walt wrote, comparing the move in twos to crypto. “Not long ago, traders were making fun of the likes of Bitcoin doing the same, and we all know how that story ended,” he added. Ironically, Bitcoin and the entire crypto complex is now running higher.
For what it’s worth, Treasurys’ quarterly selloff, at -6.4%, is a 2.7 standard deviation move. It’s not supposed to happen. Or at least not if you think it makes sense to conceptualize of the world in bell curve terms (try not to laugh).
The 5s30s officially inverted for the first time since 2006 (figure below). That was a foregone conclusion. It was just a few basis points away late last week.
As I wrote over the weekend, the macro commentary has an air of fatalism. Monday brought a predictable smattering of belabored attempts to suggest the curve’s recession track record somehow isn’t that impressive, but such musings can be summed up succinctly: “The lady doth protest too much, methinks.”
The BoJ decided to defend the upper-bound on JGB yields. There were questions as to whether Kuroda would hold off considering capping yields is easing and as such had the potential to exacerbate the policy divergence that’s driving yen weakness.
The bank will conduct unlimited fixed-rate bond purchase ops all week, a statement said. The yen responded predictably. USDJPY surged 2% past 125 for the first time in seven years (figure below).
Kuroda bought 64.5 billion yen worth of 10-year bonds on Monday after yields reached the highest since January of 2016.
“This magnifies the relative rate disadvantage of the beleaguered JPY especially versus the dollar — the high-yielding, safe haven king of G-10 FX,” Credit Agricole’s Valentin Marinov said, stating the obvious.
Monday’s early reel was all bonds and rates. In the UK, 10-year yields hit the highest since 2016. In Germany, two-year yields were approaching zero (from below, of course). Money markets penciled in four 25bps ECB hikes over the next 12 months.
Everyone wants to talk “that” trendline (in US 10s). The death of the long bond bull is upon us. But, as I cautioned last week, we write this obituary all the time. And whenever we do, it ends up being premature.
Read more: Biggest Bond Drawdown In History Imperils Everything
I am not finding any mention of just who was selling bonds into the thin overnight market. Only breathless commentary about what economic signals it is sending.
More interesting to me was just who was buying, seemingly hand-over-fist.
Who ever thought killing time in the clock repair shop would be so amazingly dramatic? It turns out the clock shop also works on emergency equipment and instruments found in cardiac operating rooms, where time is critical.
This post pandemic effort to respond to inflation is turning out to expose all the debt problems swept under the rug while the roaring twenty party raged. In essence, this clogged arteries from two years didn’t get cleaned out, and the health of the patient has substantially declined.
What seems to be going in is a divergent read on Fed inflation tactics and theories as to how to deal with this heart attack.
Does the patients heart need electric shock and immediate surgery or is this a matter of diet and lifestyle management?
These ridiculously simple metaphors relate to a very complex string if stuff going on, including, crashing municipal yields, rate hike targets, liquidity, money markets and a lot of shadow like plumbing hooked up to the Fed, treasury and the entire kitchen sink.
The reason yields are crashing is because the economic plumbing was flooded with excess liquidity, like a nonlinear tsunami. The global pandemic tsunami wave hit shore, and created an artificial V recovery, but now, that massive wall of liquidity is a mass that has to flow the opposite direction towards equilibrium.
Unfortunately, I’m not sure the Fed’s heart doctors really know how to manage this next phase of the crisis, because their rescue playbook from the GFC is based on a different event, and this time is very different.
The GFC playbook has grown thick with newly written chapters on repo stuff and a wide range of super complicated reserve functions played between banks, government entities and the plumbing warehouses connected to America’s monetary base.
To make an infinitely long story short, our soap opera has returned to the rrp repo mysteries that are the tangled mess of short dated treasury bills and artificial play money bouncing around overnight, traded between banks, mutual funds and everyone chasing micro yield, and looking for ways to shift around statutory reserve requirements.
I think that system is broken, because it doesn’t have the capacity to deal with the volume of the receding liquidity.
The confusion related to inflation gauges and short term dynamics is being distorted in realtime. The 10 year 3 month spread gauge says all is well, but as the plumbing continues to be stressed, all the shorter term flood will start to create more problems….
Ultimately this phase if the story doesn’t seem to be about inflation per say, but with discovering if the Fed has the abilities to help this all unwind without causing a greater crisis.
In closing, the following tidbit from Mr Pozsar are worth reviewing and I anticipate he’ll be issuing a market update very soon on all this crap:
“In his view, this rate hike transforms the ON RRP facility from a passive tool for establishing an interest rate floor into an active instrument that “sucks” deposits away from the banking system in a search for yield. To prove this point, Pozsar cites a money market manager claiming that the rate hike is a “dream come true.”
A further thought on the overnight antics. March 31 is the end of the Japanese fiscal year. It used to be that Japanese companies would repatriate foreign currency holdings into yen in an annual exercise in window dressing.
Unless that has somehow changed, the specs out there who drove the dollar us to 125 yen last night did corporate Japan a huge favor.
Typically that was not quickly reversed.
It’s pretty wild out there in the overnight shadow world! I just did a fast review of related stuff over about the last month and I do think there’s going to be a liquidity issue of some sort. I haven’t figured out the connections between the garden hose and fire hose and how the pressure will be regulated, but one has to assume there’s leaks, kinks and probably new adjustments ahead:
“it boils down to how much of QT will be financed via added bill issuance and the extent to which the market moves from RRP to bills,” said Gennadiy Goldberg, senior interest rates strategist at TD Securities. “The only issue is how quickly that happens – in reality it may take ages.”
…one of the first places its effects could emerge might be in foreign-exchange swap markets, according to Credit Suisse’s Pozsar. The complexity of the QT process combined with benchmark rate increases has the potential to cause dislocation in FX swaps, which could produce discomfort among potential foreign buyers and in turn have knock on effects for marginal demand, auctions and dealer inventories.’
“According to Zoltan Pozsar of Credit Suisse, half of all Russian reserves may be held in dollars, concealed using foreign-exchange swaps. These spot sales and forward purchases of U.S. dollars mean that the CBR is effectively lending dollars against collateral denominated in other currencies.”
ways of protecting its interests – either selling Treasury bonds to buy Russian commodities, or doing its own quantitative easing, for example, printing renminbi to buy Russian commodities. Pozsar expects both scenarios will mean higher bond yields and higher inflation in the West.
“When this crisis (and war) is over, the U.S. dollar should be much weaker and, on the flipside, the renminbi much stronger, backed by a basket of commodities,” Pozsar wrote. “After this war is over, ‘money’ will never be the same again…and bitcoin (if it still exists then) will probably benefit from all this.”
The world’s top central banks are about to embark on ‘the largest quantitative tightening in history’, analysts at Morgan Stanley said…, estimating that $2.2 trillion worth of support would disappear over the next 12 months.
if the economy can stand it, appears that the FOMC lead by Powell will tighten dramatically. problem is we live in a highly leveraged world- at least in developed markets so a rapid run-up in short rates probabaly cannot fly for long. the dramatic flattening taking place is a clue- Powell is saying watch 3mos to 18 mos yield curve- but if they raise rates 100 bps in 2 meetings what do you think happens there? Whether you track the short end, 2-20s or 5-30s the message is pretty clear. there are other indicators out there flashing yellow as well. it appears we are clearly late cycle….. if the music stops find a chair…
Fed stops swapping its cash for securities, while simultaneously saying it’s going to raise rates, causing people to desperately want to swap their securities for cash.
Lots of work just to strengthen the dollar. But maybe that’s the goal — a stronger USD reduces the nominal cost of nearly everything for consumers.