Remember 2008 though the middle of 2011, or the 2nd half of 2013? Me neither, but I went back and read a few of my old posts and think I have a pretty good idea of what happened. One of the key differences between that time frame and everything since is volatility. Apart from the time frame mentioned, there was no volatility.
Mid 2011-mid 2013 was the glorious confluence of US QE and European panic that had bond yields compressed in a super narrow range near generational lows. It was super awesome for fans of low rates, and super boring for people trying to cover bond market movement and risk. Boy, that one time 10yr yields almost closed over 2.40 sure was scary! (No… it wasn’t really scary, but it was the scariest thing we had back then.)
We were just treated to a somewhat similar year of trading in 2014. US rates markets were stuck between the conventional wisdom that said they were supposed to keep moving higher and the global economic realities dragging them lower. At various points in the year, the metaphorical switches that aligned our domestic interest rate fate with that of the global growth concerns were increasingly flipped. It really has been a race to the bottom, but of course, we can’t look too eager.
So we get volatility, especially when Europe runs into temporary hurdles.
The divergence in the chart above is also compounded by this week’s auction cycle (which begins today) and big corporate bond issuance (especially yesterday’s large deal from Microsoft). As a reminder, corporate issuance can hurt Treasuries/MBS on two fronts. Most simply, it offers another alternative for investors that might otherwise have bought Treasuries and/or MBS. More directly, corporations may use Treasuries to hedge their interest rate risk during the issuance process, which is a fancy way of saying they sell Treasuries to lock their rate.
What we can and should hope for is that this will prove to be yet another instance of temporary volatility that resolves itself into the same old trend that’s been intact for over a year now. The increased volatility is the price of admission to making additional big-picture gains without the benefit of guaranteed Fed bond-buying. To be clear, we always need to defend against the possibility of any medium sized bounce turning into “the big bounce,” but not only do we have several great technical lines in the sand to assess that when the time comes (2.04-2.07, 2.34, 2.47), it still looks a bit soon: