How unusual is the post-first Fed cut selloff in bond land?

The answer is: Pretty unusual, but not necessarily unpredictable.

Humans generally base their predictions in whole or in part on experience and historical precedent, which is to say the ordinary. So, out of the ordinary events do tend to be unpredictable.

But “unusual” isn’t always synonymous with “unpredictable.” I’d argue the backup in bond yields over the past six weeks was fairly easy to see coming. After all, Treasurys headed into the last FOMC meeting riding a five-month win streak. Even if that’s all you knew, you could’ve surmised that a bond pullback might be imminent.

As the simplest of simple figures (the monthly long-bond ETF chart above) shows, October was rough. But, again, bonds were overdue.

They — the bonds — also had it comin’. Because, as Nomura’s Charlie McElligott wrote Friday, one of the key macro themes right now revolves around assumptions about a “perpetually deeper deficit spending trajectory with fiscal policy dominance” across the developed world, risking “sticky higher inflation” and also “sticky high nominal GDP at least in the US,” which in turn implies “a meaningfully higher neutral rate than is currently being acknowledged by folks at the Fed,” and thus a shallower easing path “than is currently being assumed by many in the market.”

Plainly, there’s a nexus between all of that and the US election. Traders, wisely or otherwise, appeared to take their cues last month from betting markets in the course of driving up the term premium on the assumption that optically high odds of a “red sweep” in the US means reflationary fiscal policy, tariffs, immigration curbs and so on, all of which are bond bearish until proven otherwise, and whatever else they might be.

Setting aside the debate around Polymarket (i.e., questions in some corners about who, exactly, is driving those odds), the macro zeitgeist McElligott described has been in the market for a very long time, so once the September jobs report (i.e., the jobs report before Friday’s hurricane release) dispensed with “hard landing” angst left over from the early-August “growth scare,” the fiscal profligacy + higher nominal GDP + sticky inflation = higher neutral rate » shallower Fed cutting path trade had a green-light to reassert itself. And with an added sense of urgency from the perception of rising “red sweep” odds.

So, unpredictable? I don’t think so. But unusual? Yes. Fairly unusual. Have a look:

As the figures, from McElligott, show, it’s not “normal” for short- and long-end yields to rise like this post-cutting cycle onset. “We’re not in Kansas anymore, Toto,” Charlie wrote. “This term premium ‘fiscal freakout’ is not a drill.”

And yet, as McElligott went on to say, “there’s a price for everything.” Say what you will about the “deplorable” state of the union, but these are still US Treasurys. Even if you don’t want them, you do need them. Depending on who you are, you have to hold them.

While the value proposition for US debt might be described as absurd on some levels, it’s all relative. “The structural buyers of fixed income will ultimately find a level for bonds into ongoing uncertainty with a lot of yield pickup versus the paltry stuff in the post-GFC / QE era,” McElligott said.