Anyone hoping for a reprieve from the “penny stock“-esque, rollercoaster price action that’s come to define the world’s deepest, most liquid market, was disappointed early this week.
Treasurys continue to trade with no sense of decency. On Tuesday, for example, a robust read on US retail sales (and particularly an anomalous control group beat) helped catalyze a confused selloff that bear flattened the 5s30s and bear steepened (marginally, and for a spell) the 2s10s, while leaving every sector markedly cheaper in an intermediates-led rout.
Suffice to say it’s a melee, and there’s no rest for the weary. The retail sales print pushed up the Atlanta Fed GDPNow tracker for Q3 to a silly 5.4%. To call that inconsistent with the Fed’s stated goal of engineering below-trend growth would be a good late candidate for economic understatement of the year.
“A robust US retail sales report for September plus upward revisions to August’s report reinforce the view that the US economy likely expanded at a 4% annualized rate in the third quarter,” ING’s James Knightley remarked. “Coupled with the recent strong jobs numbers and hot inflation, it’s no surprise that Treasury yields push higher,” he added. “While Fed officials may be coalescing around the view that further rate hikes may not be needed, the prospect of interest rate cuts is in the far-off future and the yield curve needs to continue repricing for that.”
The nuance there is important. Fed officials have pretty clearly indicated they’re not inclined to hike again after all (i.e., notwithstanding the dot plot), so data like Tuesday’s retail sales beat shows up most prominently in the belly (as opposed to in twos), but it adds to the generally volatile nature of the price action, and the sympathy selloff at the long-end made for another outsized move in TLT, which is struggling to dig its way out of a ~50% drawdown.
In a testament to the notion that the last two or three weeks in Treasurys have been particularly harrowing against relatively muted activity in equities, note that the realized vol spread between TLT and SPY (the S&P ETF) was 18 vols on Tuesday.
That was two vols higher than the next widest TLT over SPY spread.
According to Macro Risk Advisors’ Dean Curnutt, Tuesday’s spread was the largest TLT 10-day realized vol spread over S&P realized vol in the history of the largest Treasury ETF.
Looking at the chart of TLT on the iShares website, with dividends reinvested, you are at breakeven today had you purchased 10 years ago. It has dropped about 48% since March 2020. I have to agree that it looks oversold but I am always fearful of getting cut by falling knives.
When the efforts to use fiscal and monetary tools to fight a serious economic collapse began, many advocates thought serious inflation would break out due to stable demand vs disupted supplies. Soros warned in 2010 this would happen, but sadi the alternative was worse. So far, I am reminded by 1994, where a truly massive equity selloff did not arrive, nor did the credit markets fully collapse. Personally, I thought the scenario this time would be bonds take a bigger hit than stocks, eventually we get a bit of stagflation followed by a worldwide recession. Two real mysteries: when this would happen, and what the path there would look like. I do think the 10 year trading at a yield of 55 basis points was a great signal to short treasuries- this time it looks likes the inversion in the treasury market bottomed out at 100 basis points and now we are in a bear steepener. The real question is will this very high consumer inflation hold. It’s important to remember that we won’t see much helpful data from private equity, or from alternative lending. If I was a public company, I would consider convertible debt, because if things don’t work out you can buy the debt back with greater flexibility.