by Three relatively quick observations surrounding today’s UST selloff. 1. The intensity. Reflation is the underlying short run basis, but there is ample reason to suspect quite a bit more than that alone given the unexpected interruption in Fedwire yesterday. At 12:43pm EST, most of FRBNY’s electronic services experienced an as-yet unexplained problem which interrupted service, including that of Fedwire. To this point, the New York branch has only confirmed the disruption – lasting several hours – took place, which has been blamed on an unspecified “operational error.” Reports indicate that settlement deadlines were extended into the evening, which can, and has in the past, led to short-term disturbances in interbank venues and conditions. Crypto exchanges, in
Topics:
Jeffrey P. Snider considers the following as important: 5.) Alhambra Investments, august 1990, blackout, bond rout, bonds, case counts, COVID, currencies, economy, Featured, Federal Reserve/Monetary Policy, fedwire, inflation, inflation breakevens, interbank liquidity, Markets, newsletter, TIPS, U.S. Treasuries, Yield Curve
This could be interesting, too:
Frank Shostak writes Assumptions in Economics and in the Real World
Conor Sanderson writes The Betrayal of Free Speech: Elon Musk Buckles to Government Censorship, Again
Nachrichten Ticker - www.finanzen.ch writes Bitcoin erstmals über 80.000 US-Dollar
Nachrichten Ticker - www.finanzen.ch writes Kraken kündigt eigene Blockchain ‘Ink’ an – Neue Ära für den Krypto-Markt?
Three relatively quick observations surrounding today’s UST selloff.
1. The intensity. Reflation is the underlying short run basis, but there is ample reason to suspect quite a bit more than that alone given the unexpected interruption in Fedwire yesterday.
At 12:43pm EST, most of FRBNY’s electronic services experienced an as-yet unexplained problem which interrupted service, including that of Fedwire. To this point, the New York branch has only confirmed the disruption – lasting several hours – took place, which has been blamed on an unspecified “operational error.”
Reports indicate that settlement deadlines were extended into the evening, which can, and has in the past, led to short-term disturbances in interbank venues and conditions. Crypto exchanges, in addition to mocking the Fed, reported problems in their own clearing (since cleared up).
Since Fedwire reaches into all sorts of various plumbing parts of the system, right as we’ve been talking about these lately, this would include settlement therefore liquidity across several interbank spaces including US government securities.
There is precedence; in mid-August 1990, Fedwire went down for a combination of unlikely factors. I write about these, and deeper context, in more detail for publication tomorrow. Here’s the synopsis (I’ll add the link tomorrow when it gets published):
It began with a four-alarm fire, a literal fire, raging in downtown NYC, gutting a key electrical substation that served Wall Street’s primary infrastructure.
The ensuing localized blackout on Monday August 13, emptied skyscrapers, including an evacuation of the Twin Towers, before forcing the American stock exchange to early close and, according to the New York Times, “The bond market and foreign-exchange trading slowed because broker intermediaries who supply prices for buyers and sellers were cut off, their squawk-box intercoms suddenly quiet, their computers no longer humming.”
At the Federal Reserve Bank of New York, the power outage had meant the immediate deployment of backup power. Then, out of the blue, a water-cooling pipe ruptures on Thursday August 16 which unbelievably takes down two out of the three emergency electrical generators still feeding FRBNY’s vast computerized operations.
| As you’ll see below, there was no effect on UST yields (nor money rates) when the local blackout struck even though it required the evacuation, and communication interruption, for a significant section of Wall Street and its traders.
But when Fedwire goes down three days later for the loss of backup generation (with main power not yet restored), that is what led to some chaos in money markets as well as frenzied serious selling across Treasuries; on August 16 alone, the 10-year yield jumped 12 bps; the 2-year, 15 bps. Unable to immediately catch up, backing up transactions across Fedwire, by August 24 there was an estimated $150 billion in those left to be matched, cleared, and settled. From August 16, when interruption began, to August 24, the 10-year yield surged a total of 41 bps; the 2-year, 38 bps. |
UST Yield Curve, 1990 - Click to enlarge |
| 2. The context. The bond selloff is being overhyped as if this is something unusual. Despite US Treasuries being considered “safe assets” this generally has little to do with price or lack of price volatility. The truth is UST prices have been, at times, extremely volatile (meaning “safety” is more about liquidity and credit characteristics).
This is why we’ve been comparing the current trend to prior reflationary periods; as you can see, what’s been happening over the past few weeks and months is right in line (at most) with those previous periods. To this point, the sell off has yet to even equal any of them, including those not pictured (2010, 2011). |
UST Yield Curve, 2020 - Click to enlarge |
| Each and every time yields back up as they have, it is declared to be the start of The Big One. To date, though the “rout” in bonds during those prior trends had lasted longer and went farther, including real yields, none of them ended up being anything other than false dawns or head-fakes.
In other words, there isn’t anything yet that is unusual about the current Treasury sell-off – with the exception of the Fedwire incident on Wednesday contributing something to the acceleration (and more uncertainty about how long this may go on; details remain sketchy, itself an indication that it may have been more serious than officials would want the public to know about). |
TIPS Real Yields - Click to enlarge |
| 3. The reason. The growing reflationary vibe across the yield curve (apart from bills) is almost certainly due to the COVID “curve”:
You can match up the decline in case counts and other pandemic metrics to the rise in longer-end yields. The Treasury market is beginning to price scenarios – assuming no hitch in vaccinations nor re-acceleration in contagiousness – where the economy becomes largely COVID-free (assuming also governments accede to the data) at some point in the near rather than distant future. Furthermore, it is being assumed there’s a decent chance Uncle Sam’s helicopter payments will be able to clean up or at least paper over any leftover damage from the deep and longer-lasting recession (when compared to initial “V”-shaped expectations). |
Daily Change, 2020-2021 - Click to enlarge |
| Pandemic-free with the feds absorbing the majority losses is the Goldilocks scenario; and, despite the sell-off, it isn’t being priced as some sure thing. It’s only being interpreted this way.
In other words, just like each of the prior four (five, depending upon how you classify 2010) reflationary periods, bond yields are rising, the yield curve is steepening, and real rates are moving based on a probability spectrum that increasingly sees the intermediate term as less bad than the recent past. This isn’t the same thing as some surefire inflationary recovery, as we can also increasingly observe via inflation expectations. |
TIPS LT Inflation Expectations, 2016-2020 - Click to enlarge |
TIPS Yields & Breaks, 2020-2021 - Click to enlarge |
|
Inflation Expectations, 2003-2021 - Click to enlarge |
You Might Also Like
What Might Be In *Another* Market-based Yield Curve Twist?
2021-02-23
With the UST yield curve currently undergoing its own market-based twist, it’s worth investigating a couple potential reasons for it. On the one hand, the long end, clear cut reflation: markets are not, as is commonly told right now, pricing 1979 Great Inflation #2, rather how the next few years may not be as bad (deflationary) as once thought a few months ago.
Weekly SNB Sight Deposits and Speculative Positions: SNB buying euros at high prices
2021-02-22
Update February 22 2021: SNB intervening. Sight Deposits have risen by +0.1 bn CHF, this means that the SNB is intervening and buying Euros and Dollars: The change is +0.1 bn. compared to last week.
Weekly Market Pulse – Real Rates Finally Make A Move
2021-02-22
Last week was only four days due to the President’s day holiday but it was eventful. The big news of the week was the spike in interest rates, which according to the press reports I read, “came out of nowhere”. In other words, the writers couldn’t find an obvious cause for a 14 basis point rise in the 10 year Treasury note yield so they just chalked it up to mystery.
They’ve Gone Too Far (or have they?)
2021-01-10
Between November 1998 and February 1999, Japan’s government bond (JGB) market was utterly decimated. You want to find an historical example of a real bond rout (no caps nor exclamations necessary), take a look at what happened during those three exhilarating (if you were a government official) months.
Inflation Hysteria #2 (Nominal UST)
2020-12-09
What had given Inflation Hysteria #1 its real punch had been the benchmark 10-year Treasury note. Throughout 2017, despite the unemployment rate in the US, globally synchronized growth being declared around the world (and being declared as some momentously significant development), and whatever other tiny factors acceding to the narrative, longer-term Treasury rates just weren’t buying it.
Why Aren’t Bond Yields Flyin’ Upward? Bidin’ Bond Time Trumps Jay
2020-10-02
It’s always something. There’s forever some mystery factor standing in the way. On the topic of inflation, for years it was one “transitory” issue after another. The media, on behalf of the central bankers it holds up as a technocratic ideal, would report these at face value. The more obvious explanation, the argument with all the evidence, just couldn’t be true otherwise it’d collapse the technocracy right down to the ground.And so it was also in the bond market. Inflation and their yields very much related, the lack of the former wasn’t ever used to explain the curious absence of the BOND ROUT!!! No, the US Treasury market has been beset by its own set of “transitory” factors, too. As ridiculous as some of the inflation excuses had been, Verizon’s unlimited wireless data plans the
Monthly Macro Monitor – September 2020
2020-09-30
The economic data over the last month continued to improve but the breadth of improvement has narrowed. Additionally, while most of the economic data series are still improving, the rate of change, as Jeff pointed out recently, has slowed. I guess that isn’t that surprising as the initial phase of the recovery comes to an end.
Re-recession Not Required
2020-09-12
If we are going to see negative nominal Treasury rates, what would guide yields toward such a plunge? It seems like a recession is the ticket, the only way would have to be a major economic downturn. Since we’ve already experienced one in 2020, a big one no less, and are already on our way back up to recovery (some say), then have we seen the lows in rates?Not for nothing, every couple years when we do those (record low yields) that’s what “they” always say and yet they only ever go lower the next time. But what do we mean by “the next time?”Before getting into it, the central bank simply doesn’t factor. Monetary authorities possess no monetary abilities therefore they follow along with what bond markets are already doing. Sometimes that means lowering their benchmarks, like Jay Powell’s
Tags: august 1990,blackout,bond rout,Bonds,case counts,COVID,currencies,economy,Featured,Federal Reserve/Monetary Policy,fedwire,inflation,inflation breakevens,interbank liquidity,Markets,newsletter,TIPS,U.S. Treasuries,Yield Curve