Sorry… I couldn’t think of any “B” words for “weakest levels.”
Our big project of the past week and a half has been to assess the possibility of a broad consolidation in the bond market after hitting the highest yields in years last Monday. The 3 days that followed were great in that regard. The 3 most recent days (including today) haven’t been great.
The initial weakness was consistent with the notion that there was excess buying demand in place for March’s month-end (and quarter-end) trading needs. But there were still frustratingly few viable root causes to blame. Then just after 10am, along comes Fed Vice Chair Lael Brainard with comments that sent both stocks and bonds into a tailspin. Here are the comments:
BRAINARD: I EXPECT BALANCE SHEET TO SHRINK CONSIDERABLY MORE RAPIDLY THAN PREVIOUS RECOVERY
BRAINARD: ON BALANCE SHEET, I EXPECT SIGNIFICANTLY LARGER CAPS AND MUCH SHORTER PERIOD TO PHASE IN MAXIMUM CAPS VS IN 2017-2019
In our view, the two most important comments are nothing new from the Fed, but markets are acting surprised nonetheless.
The market is confirming its focus on the balance sheet tightening angle given that 2yr yields are doing much better than the middle of the yield curve. The market is also pricing in additional rate hike potential. Fed funds futures show another 25bp hike versus 2 weeks ago.
Hatches are battened, and we continue to wait for solid confirmation that bonds have turned a meaningful corner.