Bonds that are totally smoked
The market was able to announce yesterday the Federal Reserve in a misleading way in regards to bonds. 7- and 10-year Treasuries managed to post modest gains, but 2-year yields slipped. In essence, yesterday was not a victory. It was an assurance of a hawkish Fed that won’t care about the economy until it sees actual damage, and even then, only if that damage coincides with an expected drop in inflation.
Perhaps more important than Powell’s message during the press conference (after all, it was the same message from July 27) was the takeaway from the Fed’s dot chart. Well, there is no “maybe” about it. The points are the thing! Powell simply didn’t say anything at the press conference to suggest that the markets take the pips with caution.
In other words, the market was already on the defensive for the Fed yesterday, but the reality is that traders haven’t gone far enough. Local traders are beginning to shift their focus on selling from the shorter end of the yield curve to the middle (i.e. 5-year bonds are the hardest hit). This is their way of accepting the idea that the Fed will not only take rates a little higher than previously thought, but also try to keep them high for as long as possible (or as long as inflation returns to target levels).
There is a very frustrating absence of new, individual and obvious market drivers this morning. This fact belies the scale and ferocity of the sell-off (which already saw 10-year returns touch 3.716). Sure, there is a bit of a snowball today after certain technical levels are broken, but that alone doesn’t fully explain the scale of the movement. We’ll explore it in more detail in today’s video.