The market made it through yesterday’s Fed announcement in deceptively sideways fashion as far as bonds were concerned. 7-10yr Treasuries managed modest gains, but 2yr yields got crushed. In essence, yesterday was no victory. It was a confirmation of a hawkish Fed that won’t care about the economy until it sees actual damage, and even then, only if that damage coincides with the expected drop in inflation.
Perhaps even more important than Powell’s message during the press conference (after all, it was the same message from July 27th) was the takeaway from the Fed’s dot plot. OK, there’s no “perhaps” about it. The dots are the thing! Powell simply did not say anything in the press conference to suggest markets take the dots with a grain of salt.
In other words, the market was already positioning defensively for yesterday’s Fed, but reality suggested traders didn’t go far enough. Domestic traders began shifting their selling focus from the shortest end of the yield curve to the middle (ie 5-7yr bonds getting hit hardest). This is their way of acquiescing to the idea that the Fed will not only take rates a bit higher than previously thought but also attempt to keep them high for as long as possible (or as long as it takes for inflation to come back to target levels ).
There is an extremely frustrating absence of new, individual, obvious market movers in play this morning. That fact belies the size and ferocity of the selling spree (which has already seen 10yr yields touch 3,716). Certainly, there’s a measure of snowball Today after certain technical levels were broken, but that alone doesn’t fully explain the size of the move. We’ll explore it in greater detail in today’s video.