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.

Ex-Hedge Fund Portfolio Manager, Full-Time Parent, Data Scientist and Rates Trader
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.
A 4-sigma event would be expected to happen once or twice in a trading lifetime – according to the most popular VaR-based risk models. We’ve seen 10 of those this month in Treasuries. What we should have learned from the GFC has been all but forgotten. What the market had considered to be impossibilities (or at least highly unlikely…) is quickly becoming the norm.