Bonds had two options after last Friday’s sell-off. They could either take a few lumps and get back to the business of looking for a long-term ceiling, or they could simply give up and continue pressing toward higher yields indefinitely. Up until the start of the European trading session, it looked like there was still a chance for yields to hold near their previous long-term highs (3.20% in 10yr), but less than an hour into EU trading, and all hope was lost.
Bonds are in the midst of a full-blown capitulation move with 10yr yields currently up over 16bps at 3.32%. MBS are down roughly a full point. These aren’t the biggest losses we’ve ever seen in a day, but they’re extraordinarily big losses to be experiencing at the top of trend that has already covered as much ground as the one seen so far in 2022.
To put the pace of the move since Friday in context (and explain what the market is freaking out about), take a look at Fed Funds Futures for the end of 2022 since then. There was more than a 25bp increase in expectations by Friday night and another big jump at the start of overnight trading today.
Long story short, the market is freaked out about what Friday means for the policy outlook. Wednesday continues to be one of the biggest flashpoints for bond volatility we’ve seen in a long time.