It’s possible we’re all overstating the significance of recent events in the US Treasury market.

Then again, it’s the most important market on Earth, bar none, so there’s a sense in which it’s impossible to overstate the significance of any meaningful developments.

I employed some hyperbole earlier this week in an effort to acknowledge both of those considerations. “The fate of the universe hangs on the nascent bear steepener in the US curve, along with the concurrent rise in real yields and term premium repricing,” I wrote, adding that “everything that happened last week at the long-end speaks to the largest structural shift of them all — namely the idea that the Great Moderation macro regime died in the 2020s, that r-star is higher now and that market participants and policymakers will have to acquiesce to that reality and adapt going forward.”

Clearly, the universe doesn’t care anything about the Treasury curve which, in the final analysis, is just a figment of our collective imagination. But, if the US long-end is beginning to acknowledge (and price) the macro regime shift so many market observers believe is in the process of unfolding, that’s a very big deal.

Over the weekend, I talked a bit about Goldman’s skepticism towards the explanations given for last week’s fireworks, and I later mentioned remarks from Nomura’s Charlie McElligott, who offered a more succinct explanation. “The selloff in the long-end may simply be a ‘buyers’ strike’ into peak-of-summer illiquidity in light of so many prior real money buyers of duration,” he said.

With all of that in mind, I think it’s well worth highlighting Jay Barry’s assessment. He’s co-head of US rates strategy at JPMorgan. Like Goldman’s Praveen Korapaty, Barry sounded skeptical of the idea that last week could be fully explained by the commonly-cited factors. “An old adage says ‘bad things come in threes,’ and we had three distinct fiscal announcements which arguably kicked off a strong bearish move,” he wrote. Those three fiscal announcements were (obviously) the quarterly financing estimate, the Fitch downgrade and the refunding announcement.

Barry gave very little (if any) credence to the idea that the downgrade mattered. At most, it “played a limited role,” he wrote. As to the Treasury announcements, he voiced similar sentiments to my own — I repeatedly suggested that to the extent the market gleaned anything new from the refunding details, it wasn’t sufficient to explain the scope of the price action, which anyway came on a delay.

“To an extent, an ongoing series of increases to coupon auction sizes could pressure yields higher, particularly when the Treasury market is transitioning from the support of price insensitive buyers to more price sensitive sources of demand [but the refunding] announcement was just $1 billion/month larger than our own estimates, which had already forecast a 30% increase in duration supply in 2024,” Barry wrote, adding that although JPMorgan does think supply was a catalyst, it “can’t fully explain” last week’s moves.

For Barry, valuations were a key factor. Intermediates have traded at a premium for months, he said, calling the latest moves an example of mean reversion.

Treasurys “are now trading in line with their fundamental drivers, after trading rich for the last number of months,” he went on. The figure above illustrates the point.

That mean reversion, JPMorgan said, was likely turbocharged by lopsided positioning. The bank’s clients were the longest in a decade due in part to the notion that adding duration makes sense given the proximity of the last Fed hike. “When investor positions deviate sharply from average levels, they portend a reversal in yields,” Barry remarked.

As those of you who stay immersed in markets are doubtlessly aware, liquidity conditions can be poor in August, and it’s likely that played a role in amplifying the price action too.

This wouldn’t be the first August during which lackluster liquidity contributed to fireworks in Treasurys.

Although JPMogan recommended a tactical five-year long in the wake of last week’s theatrics, Barry cautioned that “August poses clear seasonal liquidity risks to the Treasury market, and any further long liquidation could driver yields higher.”

Then there’s the macro backdrop, which isn’t exactly recessionary. It’s far too early in the quarter to take anything away from the Atlanta Fed’s GDPNow model, but it’s tracking 4.1%. Any delay in the Fed cuts the market sees for next year could put a floor under yields. In light of that (and other considerations), Barry lifted JPMorgan’s year-end 10-year forecast from 3.50% to 3.85%.

Oh, and the first of this week’s auctions (the three-year sale) went swimmingly. “This result was notable given the correlation between three-year yields and monetary policy expectations as Powell’s higher-for-longer messaging has continued to prop up rates in the sector,” BMO’s Ian Lyngen and Ben Jeffery remarked. “It goes without saying that Wednesday’s 10-year auction is the true litmus test for dip-buyers with rates anchored at 4% for the time being,” they added. “Embedded within this observation is the open question ‘Who will be the marginal buyer of the Treasury Department’s super-sized auctions?'”