Why Friday Could See A Huge Move In Treasuries

In less than 48 hours, Jerome Powell will have held his extremely anticipated Jackson Hole speech, scheduled for 10 am Eastern, and while pundits can't stop talking about what the Fed chair may or may not say about the impending taper (as a reminder, even if Powell announces a taper, it won't really matter as the Fed will still be buying bonds for most of 2022 and more to the point, it is the Treasury that will be draining as much as $800 billion in liquidity in the coming months as part of its post debt-ceiling quantitative tightening as explained yesterday).

What is more remarkable is that for all the verbal diarrhea, markets could care less. As Nomura's Charlie McElligott explains this morning, both rates and equities are pricing-in de minimis event-risk around Jackson Hole, "with Friday’s TY Straddle pricing a little over 6.4bps implied breakeven (the lowest 5-day straddle seen in 10 weeks, per IFR), while Equities shows SPY Aug 27th 448 Straddle at just 0.7% move."

There is a reason for this: the market has convinced itself that Powell will hold fire on a taper announcement, and in fact, the risk of a dovish Powell has increased at a time of lowered Q3 GDP forecasts which are "reflecting a greater impact of delta variant on the outlook, as evidenced by weaker housing starts, retail sales, and manufacturing surveys…while at the same time, fwd looking U Mich- and Service PMI- surveys are showing significant drops as well." Furthermore, the fact that noted Fed “hawk” Kaplan last Friday explicitly addressed growing Delta variant risk, saying he may need to adjust his views and that he is watching “very carefully”, was seen as a “tell” that the conversations internally amongst the FOMC members might have already turned, with regard to this now larger impact of the virus wave on economic activity.

Ironically, McElligott also notes that the Fed would be doing this just as many in the market are turning the other way and indicating that they are again willing to take shots on bearish fixed-income expressions, with one key component of that being a view that the worst of the COVID Delta wave is behind us and was already “priced-in” with yield lows made start August. As we noted last night, the delta of Delta is now negative...

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