In an apparent concession to the season, the bond market seems to grow darker by the day. The latest trend is what bond geeks and ghouls call a “bear steepening”, which refers to short and long term yields converging by the latter rising … short term yields rising less than long term yields so that the difference diminishes.
[2023 1023 edit: The original version of this post referred to a “bear flattening” because the curve has actually flattened from a deeply inverted or downsloping configuration. Nevertheless, bond jargon refers to it as “steepening” because the slope has increased; less negative being more positive.]
In spite of a twenty year auction spun as “strong”, bond prices fell again on the day across most of the maturity spectrum. It’s not clear just how high yields will have to go to keep supply and demand in balance. That supply is an issue is finally being acknowledged in a mainstream media that at first held fast to the notion that it was all about the market belatedly taking the Fed’s “higher for longer” mantra at face value. Such Fed rhetoric can explain why yields up to around two or so years have moved higher, but it’s a bridge too far to extrapolate overnight rate targets decades hence. As I’ve long maintained, nothing the Fed has said or reasonably could say would commit it to any given rate policy more than a few meetings out. To the contrary, the Fed itself has begun to soften its line, likely paling at the horror show in the bond market.
This isn’t to say Fed funds won’t be higher than zero five or ten years from now. It’s to say nobody could know. The Fed included.
The specter of unprecedented supply on the other hand is no matter of speculation. It’s a fact in the here and now. The net increase in federal debt has been running in excess of a trillion dollars per quarter with no end in sight. The twenty and thirty year yields both broke 5% today for the first time in decades, closing most of the gap with their short term doppelgängers. The scary numbers:
1Y – 5.47%
2Y – 5.19%
3Y – 5.03%
10Y – 4.91%
20Y – 5.20%
30Y – 5.00%
We’ve long been on alert for the yield curve to begin to flatten, but imagined short yields falling into line with the long, not the other way around.
Even the stock market is getting spooked. Ever see one of those comedy gags where an actor in the mirror almost exactly mimics the protagonist’s every move? Stocks are playing the role to a T. Almost every zig and zag by the bond market is mirrored by the stock market. Except that on the whole stocks have barely dug a shallow grave next to the descent of bonds into the depths of Hades.
Yet. It’s hard to imagine Wile E Coyote indefinitely remaining suspended in mid air without ever looking down.