A SIGNIFICANT SELL OFF IN THE BOND MARKET

Long dated Treasuries were crushed yesterday.  The 30-year benchmark was down over three points surging 14 bps in yield to 1.95% and the 10-year is off over a point surging 14 bps to a 1.44% yield.

The yield curve is sharply steepening with the greatest increase between the 2 year and 30-year Treasury, surging at over 11 basis points.

Why the selloff?  Is it the realization that tapering will commence perhaps in November and end “mid 2022?”  As widely noted the Federal Reserve has been a net Treasury purchaser of 60% of all issuances for the last several years.  Who will pick the slack?

Is it the realization that budget deficits will be more than $1.5 trillion for the intermediate future?

Is it from the announcement that the White House and the House has agreed upon a “framework” for the next “infrastructure bill” that will add further funding pressures?

Is it the result of sudden realization the Federal Reserve’s inflation forecasts have been wrong by a wide margin?  The WSJ wrote yesterday with all its perceived forecasting prowess, the central bank has misjudged pricing pressures.

Wednesday the Fed forecasted a 2021 inflation rate of 4.2%, up from 3.4% in June, 2.4% in March and 1.8% in December.   Is the bond market losing confidence in the Fed?

Is it the result that growth will exceed expectations, the result of the massive 33% increase in money supply where monetary velocity is now accelerating given the immediate loss in funds given a 5% inflation rate and 1.40% 10-year?  The gap between the inflation rate and the 10-year has only been greater than this only two times in history and both times were during oil spikes.

Is this an aberration or something of significance?

As noted many times 90% of Treasury trading is done algorithmically.  A pivotal support was broken late yesterday afternoon on the 10-year suggesting that this benchmark can potentially trade to around 1.65% in quick order, the inverse of summer’s explosive advance. Will this occur?

To write the obvious.  There are more questions than answers.

Equities, led by energy and financials who are perceived to be the beneficiaries of a steeper yield curve and stronger than expected growth, advanced.  Oil closed at the highest level since October 2018.  Goldman is suggesting crude can trade to $90/barrel if there is a cold winter.

Last night the foreign markets were down.  London was down 0.17%, Paris down 0.92% and Frankfurt down 0.74%.  China was down 0.80%, Japan up 2.06% and Hang Seng down 1.30%.

The Dow should open nominally lower after China stated cryptocurrency transactions are illegal. Global sovereign debt yields were relatively unchanged following the BOE announcement that it may raise rates in November to combat stronger than expected inflation. The 10-year is up 2/32 to yield 1.42%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.