I tend to think about coverage of “Liquidity and the Funding Market” in the same way as “Child Stars of the 90s and the Eurotrash Nightclub Scene”. If they’re making headlines these days, it’s not because things are going well for Liquidity; it’s because they’ve been discovered face-down in a miasmic pool of ever-deepening turpitude & even their best friends are starting to get really, REALLY worried…
The interest rates market is recovering lost ground from last wk’s smoking carnage on the back of a monster move in the oil market over the weekend. It’s important to understand why this matters for rates, especially given current conditions in the bond market.
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?
Thanks to policy-induced crowding-in of Treasuries, the front-end of the curve is now doing exactly what the Fed feared the most. A nightmare scenario of cutting rates… and nobody caring. Positive historical skew has made them a popular diversifying asset for the momentum crowd – and that’s exactly why we should be concerned.
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.