Bonds. Everyone’s talking about them.
Well, probably not “everyone.” And if someone is talking about them, that’s probably not someone you want to talk to. I’m reminded of a quip about the European front-end: “Euribor: You’re a bore.”
Bonds are topical among folks you’d expect to be talking about bonds. When you put it that way, I’m not sure “topical” means anything. College football’s topical among college football fans. And so on.
Aaaaanyway, it’s been a rough month for Treasurys. What goes up, must come down. Or if it’s easier for you to talk about yields than prices, what comes down must go back up.
As the figure shows, bonds are back-footed to the tune of 2.5% or so following a five-month rally.
The proximate cause of the selloff’s debatable, but it’s some combination of resilient US macro data, renewed concerns around America’s fiscal trajectory and the prospect of a “red sweep” green-lighting full implementation of Donald Trump’s agenda in a hypothetical second term.
Suffice to say deregulation, unfunded tax cuts, tariffs and deportations could be a recipe for higher long-end yields. But that’s a small price to pay for renewed American greatness, am I reich?! Wait, sorry: Am I right?!
Treasury cut the borrowing estimate on Monday to $546 billion for the October-December period from the $565 billion previously tipped, and coupons should be unchanged in Wednesday’s QRA, which’ll be all about the “forward guidance” (if you will). That is: When will coupon auctions need to increase again? It’s impossible to know given ambiguity around who’ll control the White House and the proverbial purse string on the Hill.
That political ambiguity’s playing havoc with bonds, and as discussed at some length in the Weekly, the MOVE registered a huge jump when Election Day entered the one-month expiry window for the options used to calculate the index.
Elevated bond vol isn’t without risks. “With dealer balance sheets bloated, elevated volatility could turn into a liquidity issue,” BNY Mellon’s John Velis remarked. The figure on the left, below from Velis, plots the MOVE with dealer balance sheet holdings as a share of outstanding. “Should the red dot move up and to the right, we could see liquidity issues pop up in the longer end of the coupon curve,” he went on.
The figure on the right’s familiar: It’s betting odds with the term premium. I joked about that “correlation” on Monday in “The Big Bond Question“.
“We think there is a bit of a ‘Trump premium’ at work [as] most of the move higher in 10-year yields has come from a similar move higher in the term premium,” Velis went on. “It appears that the inflationary impact of tariffs and the fiscally expansionary portion of many of his proposals are driving up perceived Treasury risk.”
Yes, it does “appear” that way. And I gotta tell you: Playing chicken with the bond market’s generally a bad idea. As James Carville famously put it, “If there was reincarnation, I would like to come back as the bond market. You can intimidate everybody.”
Trump isn’t one for intimidation unless he’s the one doing the intimidating, though. If yields were to press higher in response to a “red sweep,” we could get a staring contest between Trump and the bond vigilantes. “Never surrender!”
