Two weeks ago, I wrote that the front-end of the interest rates curve was in serious trouble – given that policymakers were keenly aware of their deficiency in handling any selloff; more so than any point I could recall in my two+ decades of Treasury trading.Today, we’ve just witnessed what qualifies as easily the largest 2wk move in the front-end of the Treasury market in 10+ years. So what happened, exactly?
Perhaps you’re wondering, having read breathless press accounts of what to expect from today’s ECB, what a “bazooka” buys you these days in Europe?
Well, Turns Out… A “Bazooka” Ain’t All That It Used to Be.
You want some duration? Try this on…
The CTA community has likely sold in excess of $100bn 10-yr Treasury equivalents in the last 5 days – and that number is only going to grow.
As August comes to a close, one can’t help but wonder just how dependent risk assets have become on everything from tweets to rebalancing. The biggest form of life-support comes from the Fed: equities are in a world of total dependency.
What’s lost in the kerfuffle over signals that may or may not be sent by shape of the Treasury curve is the fact that the front-end is now doing precisely what Fed officials feared the most – and what they are least equipped to handle.
This isn’t intended as a rant against the practice of diversification – nothing could be further from the truth. But, like all popular investment tools, there’s a mythology that’s been created around modern portfolio theory to suggest a panacea to cure all ills. It’s peddled as a fairy tale that ends with investor & portfolio happily ever after – together on a horse, riding off into the sunset. My argument is that the benefits of diversification depend on having appropriately calibrated priors. And when those priors are dramatically altered, it’s time to reassess – not double-down.