The Perfect Storm In Bonds
Submitted by Tyler Durden on 06/30/2013
The Fed has managed to remove some of the complacency in financial markets for now, but we would also argue that financial markets have managed to remove any complacency the Fed (and any other central banks) may have had regarding how easy the exit strategy from QE was going to be. As we discussed here, the market and the Fed are trapped in a prisoner’s dilemma, and, as Citi notes, the events over the past three weeks make it clear that ‘collaboration’ is the best strategy – i.e. a non-complacent market and no hawkish surprises from central banks. There is a big risk to this scenario though. As Citi explains, a risk that we fear not even the recent dovish messages by central banks may be able to do much about.
The recent sell-off has, unlike the previous sell-offs this year, managed to trigger outflows in funds and ETFs; as we mentioned above, our credit survey reports the first outflows since 2008. The negative feedback loop which has been triggered around fund and ETF outflows has gained a momentum of its own and the following four charts suggest bonds are in fact primed for the perfect storm.
Via Citi,
The credit market may have never been more vulnerable to rising Treasury yields.
MTM investors make up a much higher proportion of credit investors now than normal,
and MTM risk itself is near all-time high.
amid record low breakevens (i.e. a need to reach increasingly for yield)
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