What (or who) turned the tide nine weeks ago for markets?

Put differently, what was the proximate cause of the two-month “everything rally” which, when the dust settled, counted among the most pronounced, inclusive asset price surges in recent memory?

There are a lot of candidates, and the most accurate answer is one that takes all of them into account. But it still feels, to me anyway, like Treasury’s refunding announcement on November 1 gets short shrift.

Wait! Don’t go anywhere! Stay with me. I realize that a lot of you read “refunding announcement” and think “blah” or “meh” or “just kill me now.” I’m also acutely aware that in world of catastrophic natural disasters, wars of conquest, bloody religious conflict and superpower culture clashes with the potential to bring about the apocalypse, Janet Yellen’s decision to undershoot market expectations for coupon increases two months ago seems a tad bland.

However, if you tally the dollar value of the gains across assets from November 1 through year-end 2023, you get… well, a very large number. A huge number the likes of which nobody’s ever seen before, as one man who may not be eligible for several state primary ballots might put it.

The simple figure above says it all. Or it says a lot. The term premium was 50bps into positive territory by the end of October. The refunding announcement reversed the ascent, as the smaller-than-expected coupon increases suggested Treasury was prepared to heed the market’s (over)supply concerns.

That reversal started the ball rolling on what would eventually be a 110bps decline for US bond yields from cycle peaks. That rally fed on itself as legacy CTA shorts across STIRs and bonds were subjected to a rolling stop-out.

For equities, that was a veritable godsend. “In the end, 2023 was yet another reminder that the direction of US bond yields remains of paramount importance to the performance of asset markets, and without the end-of-year pivot, the outturn would have been far gloomier,” SocGen’s Andrew Lapthorne wrote, in his first note of 2024.

The figure above shows a record share of equity market cap that needs (or wants, anyway) lower bond yields.

“This stands at or very near record highs in both the MSCI World and the S&P 500, leaving investors horribly exposed to [an] interest rate shock in 2024 and lacking in diversification when these equity indices are then combined into a 60/40 that includes bonds,” Lapthorne went on.

Below, find a simple visual which underscores just how pivotal the refunding announcement really was for US equities.

“Yellen’s Treasury ‘issuance twist’ was the turning point for duration sentiment and positioning, and with it, cross-asset returns,” Nomura’s Charlie McElligott remarked.

The refunding announcement marked the highs for yields “almost to the day” and was “bang-on the S&P futures lows, which rallied ever since,” McElligott went on.

So, if you’re wondering who to thank for your good financial fortune of late, think Yellen, not Jerome Powell or Chris Waller.