Summertime seasonality is one of the worst kept secrets among bond forecasters. Simply put, since 2010, this is only the 3rd year where yields haven’t bottomed out for the year or rallied noticeably in the 3rd quarter (July-Sep). Or looked at another way, there have only been 2 years in the past 12 where yields were NOT trending higher in the last 3 months of the year. While the timing and scope of the momentum can vary, the point is that traders generally assume “summertime seasonals” to be favorable for bonds. That means at some point after any given summertime rally, bonds are at risk of a defensive shift.
When there are actual reasons to sell, that shift is even more noticeable. This has been a big problem in the past 3 years. All 3 had noticeable summertime gains followed by justifiable weakness. The end of 2020 saw the first seeds of hope for the post-covid economic recovery. The end of 2021 brought the big shift in concern over inflation and Fed policy. And now as the summer of 2022 ends, we’re again seeing a shift away from recession fear in favor of concerns surrounding what may need to be even more aggressive policy action from the Fed.
Indeed, general central bank anxiety is likely in play as the new week begins. The European Central Bank (ECB) expected to hike 75bps on Thursday. In addition, we have the Bank of Canada tomorrow and the Bank of England next week, not to mention Australia’s central bank hiking 50bps overnight (as expected).
But perhaps the biggest central bank anxiety surrounds the Fed, which will meet in exactly 2 weeks after having a chance to digest another decent jobs report and a to-be-revealed CPI next week (incidentally, right before a communications blackout period–much like the lead up to the June meeting when the market experienced its sharpest rate spike of the year to the weakest levels in more than a decade.
Adding immensely to all of the above is another seasonal occurrence: heavy corporate bond issuance in the first week of September. Corporate issuance matters for day to day rate volatility for two key reasons:
The issuance process often involves the selling of Treasury debt as a hedge (in the same sort of way that locking a mortgage rate can involved the selling of MBS).
It simply adds more “supply” to the bond market in general. MBS and Treasuries thus face additional competition in the supply/demand equation. The buyers of MBS/Treasuries aren’t always also potential corporate bond buyers, but there’s more than enough overlap to hurt.
With all of that in mind, the new week is beginning with an absolute deluge of corporate deals. Yes, elevate issuance was to-be-expected, but like anything in the market, reality can end up coming in on either side of expectations. In today’s case, it’s crushing expectations. In just the past few hours, we have seen new corporate announcements for:
Southern Gas Co
While we can’t be sure what the exact dollar figure will be once all of the deals are priced, there are enough big names in that list to know it will be in the 10s of billions. That’s a lot of underwriting to request of bond buyers on the same week they’re dealing with new reinvestment caps on Treasuries and MBS, effectively eliminating reinvestments as of 9/1/22.