As expected, bonds did nothing today, apart from a possibly detectable response to the inflation-expectation components of the Consumer Sentiment data. Inflation expectations are indeed something the Fed considers when it comes to the rate hike outlook, and if consumers are expecting lower prices, it doesn’t make a strong case for increasingly aggressive hikes.
All that having been said, there really wasn’t much of a measurable response, and bonds are ending the holiday-shortened week in substantially similar fashion to last week, holding a narrow range around the same trading levels.
In anatomical terms, late December is like a superfluous appendix, or the average wisdom tooth: it’s OK to have, but you shouldn’t think twice about throwing it out if it causes you any trouble.
It’s one thing for me to give you my take on the effects of the holiday season on bond markets, but primary source material can’t be beat. Scott Buchta, Head of Fixed Income Strategy at Brean Capital sent out the following note this morning, and I thought it did a much better job of capturing the point I constantly try to get across in the late-December commentary, AND in far fewer words. Enjoy:
“Thinking back to the time I spent at Bear Stearns, I always remember the day before Christmas as being one of my favorites. It was always an early close and we would all bring our kids into the office for the day (the train ride alone made everyone’s day). It would be pure chaos on the trading floor during the morning with the kids running around, balls flying through the air and the sounds of laughter everywhere. At noon, Ace Greenberg would gather everyone in the auditorium and perform a magic show for the kids (more chaos) and then Santa would show up with presents before everyone made their way home. In Chicago, our celebration usually involved playing video games in the conference room and ordering pizza at 9am. No wonder all of our kids wanted to get in the business!
Merry Christmas and Happy Holidays to All!”
So, the next time you think of the bond market as some vastly complex, dynamic, juggernaut in perpetual motion, just remember that the guys making it all happen are people too. That seemingly inexplicable dip/spike in trading levels might just mean that one side of a previously balanced trade got caught up taking a picture of his/her kids with Santa, playing video games, or grabbing another slice of pizza.