How Bad Could it Get (And Why It Won’t Get That Bad)

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I’ve mentioned the comparisons between 2013 and the current selling trend several times recently.  Most of those have been in response to journalists and analysts claiming some weird connection to high bond yields and stock market weakness.  My contention was that a surge to 3% 10yr yields in 2013 didn’t cause much of a stir in 2013, so why would 2018 be any different?  Moreover, I noted that things happened a lot quicker in 2013.  Well, to be fair, they did and they didn’t.

I’ll revise that last point just a bit and say that things happened at roughly the same speed if we examine the 1.5-month stretch leading up to the official tapering announcement.  I’ll never forget it.  It began with a Wall St Journal article by John Hilsenrath who many believed had secret one-on-one meetings with the Fed in order to strategically leak policy details via his articles, thereby helping to soften the blow for financial markets and avoid overly-panicked reactions.

I love a good conspiracy theory, but tend to disregard them.  It could be that Hilsenrath is just a good reporter who saw the writing on the wall.  Either way, if there was ever a time to leak policy plans to soften the blow for markets, May 2013 would have been a good time.  In my mind, however, I think the writing on the wall was fairly clear based on Bernanke’s comments from March 2013 (he totally foreshadowed tapering) combined with a surprise surge in NFP numbers (and revisions to 2 previous months of numbers that essentially made markets forget Bernanke’s March comments).

I covered all this in the morning commentary that preceded the June 19th tapering announcement.  It’s one of the best things I ever wrote in terms of understanding the broadest and most important themes of the post-crisis rate environment.  If you haven’t read it a few times, here it is.

All this to set up today’s chart and to say that however bad things have been in the past month and a half, at least this isn’t 2013.  If it were, we would see 10yr yields at 3.4% by this time next week. 2 weeks later, we’d be at 3.5, and another month on, we’d by up to 3.75%.  As it stands, the current sell-off has been incredibly sober and steady by comparison.  There’s essentially no chance we end up following a path like 2013 when it comes to 50bp sell-offs in the space of a week simply because we don’t currently have the same sort of monetary policy dominoes at risk of falling.

Just so we’re clear, PLEASE NOTE I’m not saying rates won’t continue higher.  They certainly can and probably will.  But that journey will continue to be much more muted and variable than the abrupt re-pricing the Fed’s participation in bond markets seen in 2013.


MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.

MBS

FNMA 3.5

99-18 : +0-04

Treasuries

10 YR

2.8949 : -0.0181

Pricing as of 2/15/18 10:07AMEST



Original Source