Ninon Bachet finally scored a prominent quote in a Bloomberg feature piece.
When you peruse as much sell-side research as I do, you come across scores of names. Most notes, and particularly weeklies, are group efforts. A half-dozen analysts may be involved, but sadly, most are condemned to obscurity, while the same handful of people become synonymous with each bank’s research.
To be fair to journalists, it’s cumbersome to list all half-dozen people who might’ve contributed to a given weekly, but when you see quotes attributed to “analysts led by…” spare a thought for the unnamed “led.” They’re working too, and they typically toil faceless in perpetuity.
Anyway, Bachet is in EUR fixed income strategy at SocGen, but like a handful of her colleagues, she’s typically subsumed under the Subadra Rajappa umbrella. Rajappa is a fixture in mainstream media coverage of US rates. The title of the bank’s FI weekly is “Scarefest.” “The global inflation bogeyman continues to scare the bond markets,” Bachet and six friends wrote. It’s a “scarefest” in Treasurys, where yields are “decisively above” the bank’s year-end target amid persistently elevated price growth across developed markets. The Fed’s “aggressive policy response increases the probability of a hard landing.”
Note that 10-year US yields were on track to rise for a dozen weeks in a row (figure below). That’s a lot of weeks. In fact, as Bloomberg pointed out in the linked article above, the last time the benchmark of all benchmarks sold off for 12 consecutive weeks was in 1984.
On Thursday, just before 10 AM in New York, someone bet $18 million on additional cheapening in 10s via 7,500 March 2023 puts.
Long-end US yields continued to climb on Friday morning in the US, in what was initially a sharp bear steepening move. Later, rates reversed course, with the front-end rallying hard.
Friday’s epic U-turn and attendant bull steepening impulse temporarily changed the narrative, but intraday volatility aside, it’s worth taking a moment to consider the recent bear steepener, illustrated in the figure (below).
Whenever possible, I try to ensure that each article here is updated such that readers who come late won’t be perusing stale analysis. But rates volatility is now such that time-stamping charts is necessary in order to avoid any such confusion. All coverage in 2022 needs a caveat to account for the fact that virtually everything is stale upon publication, hence the time stamp on the chart. As alluded to above, Friday was no exception. Thanks to fresh Fed pivot speculation, rates were a roller coaster into the weekend.
Setting that aside and refocusing on the bear steepener discussion, that mode of the curve is unnatural in an active Fed environment, and potentially ominous. Regular readers will recall that the QE era ushered in a new regime in terms of the correlation between the short-end and the curve. With short-end yields anchored by an inactive Fed, the curve was prone to bear steepening and bull flattening, as the long-end was the only sector that had freedom of movement, and acted as a referendum on the Fed’s success at engineering better growth outcomes and averting disinflation.
The figure (below) illustrates the point. “Bear steepeners or bull flatteners are generally modes that represent unstable rate dynamics,” Deutsche Bank’s Aleksandar Kocic said.
“Normalization of the curve, i.e. restoration of its directionality, was one of the main ingredients of the Fed exit strategy in the previous cycle [and] except for [a] short period in the summer of 2019, it was largely unsuccessful,” Kocic went on to write, in a recent note. “However, this was accomplished more than two years later through the market’s anticipation of a forceful action of the Fed when the correlations market showed a dramatic reversal of directionality on the eve of the present cycle,” he added.
So, what are we to make of the bear steepener? I won’t endeavor to answer that just yet, but I did want to highlight it. BMO’s Ben Jeffery and Ian Lyngen took note Friday.
“Had the latest [Treasury] selloff been flattening in nature, the shift higher in terminal estimates that has transpired over the past week would have resonated as a monetary-policy driven story [or] on the other hand, if 2s10s reaching its least inverted level since the end of September had been bullish, we would have given most credit to mounting skepticism that the Fed would follow through with its projected tightening,” they wrote. “Alas, it’s been a week in the US rates market that has demonstrated the current level of apprehension among investors to stand in the way of the volatility as early November’s event risks quickly approach.”
Those event risks include the Fed meeting, payrolls and the midterm elections, all of which have implications for rates. I’d suggest, in closing, that an extension of the bear steepening dynamic into an increasingly fragile, illiquid Treasury market could be perilous.
Next week will be instructive. Friday’s fireworks mean rates watchers will be keen to see if any bull steepening on more pivot speculation gathers momentum, or whether the long-end continues to reflect growing concern about the persistence of inflation and the Fed’s capacity to corral it.
