The switchbacks that US rate markets have witnessed in the past few days have been quite breathtaking. It’s not just that the moves have been big — we’ve been seeing a lot of that lately as traders adjust their views on inflation and growth — but that the market has been turning so sharply within the space of a session, and seemingly out of proportion to any change in fundamental circumstances that data or central bank commentary might suggest.
The volatility underscores not only a lack of certainty about which way inflation and recession risks will play out, but also speaks to both the lack of liquidity within markets and a lack of real conviction among investors. The former has been a hot topic of discussion, particularly as the Fed embarks on its quantitative tightening program. And the latter is borne out by recent indicators that show many folks desperately clinging to neutral stances.
The big round number that is 3% provides a useful illustration for just how whiplashy things have been. Earlier on Wednesday, it was a key focus for the long end, with the 30-year breaking below that level for the first time in over a month. But by day’s end, the long bond was nowhere near there and it was the two-year rate pushing back above that level.
The 10-year yield meanwhile had a roundtrip of almost 19 basis points on the day Wednesday, having been down more than 6 and ending up by more than 12. And it had an even bigger journey the day before, albeit in a broadly opposite direction.
This doesn’t all happen in a vacuum, of course. Various economic indicators and the release of the most recent Fed minutes have provided plenty for traders to chew on. The vagaries of risk-taking in stock markets and elsewhere are also adding to the turbulence. But it’s still hard to see a catalyst for investors genuinely reassessing their views so much in such a short period of time.
And indeed, if you step back a little, you see they’re not. Despite all the sound and fury, the ranges for say, the 10-year yield, have been broadly similar for the past three days. Little wonder, I guess, that real money investors might look to stay on the sidelines a bit longer, at least until they summon a slightly more conviction themselves about which way the economy, policy and markets are headed.