zerohedge.com / by Tyler Durden / Oct 27, 2016 10:13 AM
If traders aren’t looking at global rising bond yields, and increasingly steeper curves, they should be because as RBC’s head of criss-asset desk strategy Charlie McElligott says in his latest market note, “That is VaR crushing DV01 destruction at its finest” and is also the reason why equities are suddenly taking on water.
Here are the highlights:
GLOBAL RATES AGAIN DANGEROUSLY HIGHER, BUT STOCKS AND VIX RELAXED
The absolute focus overnight / today is “core” macro though, as global developed market rates are being re-priced “risk manager style,” particularly with EGBs under MAJOR pressure as the buyside is caught wrong-footed (as I type, Slovak 10Y +7.2bps, Denmark 30Y +9.4bps, Netherlands 30Y +9.9bps, Finland 30Y +10.1bps, German 30Y +9.9bps, Austria 30Y +9.3bps…and even front-end seeing outsized moves with the Belgian 2Y +2.2bps). That is VaR crushing DV01 destruction at its finest.
Without question, a constant theme we’ve hit on in the “Big Picture” over the past few months is the risk of a market hyper long duration on lazy QE-induced “yield compression” trading, into an environment where CBers in coordinated fashion are telling us they want to steepen the curve / get long-end yields “higher” (overnight Kuroda stated exactly “this” desire to see long yields rise / steeper curves—and even “alluding to” future tapering by saying that the BoJ may not need to buy Y80T of bonds indefinitely—H/T Todd Cross). Why are so many caught “wrong” by this? Perhaps it’s a “fool me once / fool me twice” dynamic of market complacency with CB rhetoric. But I have also referenced (since early Summer) the danger of the “false signal” of “mechanically” lower rates, as many have misinterpreted them as a direct read on “low growth” / “low inflation” in perpetuity…when in fact, much of it was simply due to said “duration grabbing yield compression” from the “real money” universe (and piled-on by momentum-chomping systematic CTA / trend-following community) in light of CB NIRP policies and unprecedented asset purchases.
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