Less Than 1 Basis Point Away From Convexity Disaster

(Update 1040am ET): well, we have crossed above the level where the selling in 5Y TSYs will become self-reinforcing.

Buyers better emerge here or the Fed is about to have a very, very bad day.

* * *

With the stunned world watching with bated breath every tick move higher in 10Y yields, Mizuho bond strategist and trader Peter Chatwell writes in and points out that "5Y UST now leading the sell off. This is a warning signal that the rates sell off is going beyond a repricing towards a convexity move. This is something which we think is inconsistent with Fed dovish rhetoric on rates."

As Chatwell ominously adds, we are "suddenly just 5bp below the 0.75% 5Y UST inflection point. If the sell off extends beyond there, we think US stocks and credit spreads will suffer."

Alas, since this email has come in, the 5Y has blown out even higher and was last trading at 0.7441%, less than 1 basis point away from what may be convexity disaster...

... meanwhile, the 10Y is trading at 1.4905%, also 1 basis point from the critical 1.50% level that Nomura predicted would lead to a sharp selloff in risk assets.

Incidentally, while 0.75% may be a critical convexity threshold for the 5Y, similar breakpoints on the 10Y are at 1.39% (which could and has fueled a burst of selling that pushes the rate up to 1.45%) and then the next big one is at 1.55%, according to Seaport's Tom di Galoma.

Today's pukefest accelerated despite what at least superficially appeared to be some good news for convexity flows yesterday when swap spreads collapsed suggesting the gamma feedback loop in rates was ending.

Turns it out wasn't.

For those unfamiliar with convexity hedging/flows and why it is a potentially disastrous feedback loop where selling begets more selling, think stock gamma only to the downside. Here is a quick primer from Bloomberg:

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