Jay Powell Is In The Way (Literally, For The UST Curve)

Early in May 2013, the word “taper” exploded into the mainstream. It was everywhere, scarcely an article was written or news story pieced together which hadn’t included the term (even though Ben Bernanke never actually said it). The so-called tantrum spread like wildfire simply because of what it represented, the very thing everyone had been waiting for. Confirmation, at last, the long economic nightmare, about half a decade to that point, was over.

For much of the rest of 2013, there were various calls for an end to the “30-year bond bull.” Setting aside the inappropriate use of the characterization, these were obliged by a growing selloff in that market. The usual suspects were given blanket coverage in the usual places:

Bill Gross said the three-decade bull run in bonds ended last week when the 10-year Treasury yield hit 1.67%, in his latest attempt to call the top in a market whose buoyancy has been aided by central-bank policy and long questioned by skeptical investors.

That was the first paragraph written for the self-described bond king by the Wall Street Journal on May 10, 2013. The second was actually the one that has mattered:

The manager of the world’s largest bond fund stressed that a bear market in bonds won’t start until economic growth and inflation pick up — an arrangement that he doesn’t expect to see immediately. [emphasis added]

Coming up on six years later, we are still waiting. To Mr. Gross’s credit, he was right about what will kill the bond market. There is a massacre waiting for it at the end of the line. But it doesn’t happen until sustained, meaningful economic recovery is a realistic shot. It sounds like time is a factor here, quite easy to fall into the trap since we’ve waited long enough for a reversion back to the growth mean.

There is a new economic mean, a bad one, the kind of underlying condition that keeps liquidity hedging right at the top.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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