Please note that you are about to leave the website of Market Thinking and be redirected to Toscafund Hong Kong. For further information, please contact Toscafund Hong Kong.
Institutions that were regulated into buying bonds now find the same 'rules' forcing them to sell. The ultimate buyer won't be the Fed, but the trillions sitting at the short end of the curve and in Money Market funds. For them to move the Fed need to signal an end to tightening and a modest cut. More important is that the asymmetric nature of the bond math(s) is such that while a 50bp rise in yields would leave a 12 month return flat to down slightly, a 50 bp drop would give double digit returns. For bond investors not forced to sell because of regulatory rules, this looks compelling and we suspect that many are thinking that, either when the selling stops or the Fed signals there won't be a second chance to get that duration trade on.
We remain unconvinced that Central Banks are raising rates in recognition that their previous policy of zero interest rates not only failed but backfired spectacularly. Indeed, we sense that they are simply chasing reported inflation rates higher risking equal and opposite damage and disruption t omarkets and economies. With the latest inflation numbers coming in weaker, expectations of aggressive tightening are thankfully weakening. For countries with highly rate sensitive household sectors as short term fixed rate mortgages roll off, this would be a major blessing.