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.
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.