What Bond Traders Are Saying: "It Won't Be Pretty"

Tyler Durden's picture

With rates seemingly flip-flopped today (yields higher as stocks drop), we thought it worth skimming what the smart money in the bond market is thinking. As RBS Strategist Bill O'Donnell warns, "Janet must act like a diving instructor, hoping to bring levels to the surface without giving the economy the bends. What makes it really risky for Janet is that financial sector regulation has created a ‘one-way valve’ in secondary market liquidity. Nobody really knows how the system will hold up under duress." This is confirmed by Scotiabank's Guy Haselmann who fears, "the Fed will have difficulties controlling market gyrations and its potential loss of credibility from troubles that are likely to arise from its exit strategy."

RBS strategist Bill O’Donnell writes in client note.

“It won’t be pretty, regardless. My assumption is that investors will sell or hedge where they can first (ETFs or hedge in ever-liquid USD swap spreads) and that’s one of the many reasons why I fancy 5yr swap spread wideners as a medium-term trade”


“I won’t get long-term bearish on bonds unless/until there are clear signs that animal spirits have re-emerged in the US economy or that EU rates are lifting off the floor”

Other observations from morning notes by strategists and traders:

CIBC (Tom Tucci)

“The last several long end buybacks have been price extremes for the day. This indicates to me that the only real buyer of bonds at current levels is the Fed”

Credit Agricole (David Keeble)

“More interest is focused upon the curve shape and we’re beginning to feel that the consensus that the curve will continue to flatten is losing some adherents”


“We are reluctant to throw in the towel on the 2-5Y and 3-5Y flattener trades, believing that their large movements are only just beginning”

CRT (David Ader)

“Have never encountered such a sideways market for such a long period of time; there was a time when we would say it was coiling in advance of a big and abrupt move, but that doesn’t seem the case now as gradualism and tweaking seem more the case”

ED&F Man (Tom di Galoma)

“Still regard the pension extension and the need for duration (and lack of it in the market) as the overriding concern for the market place. Look for 10yrs to trade in a 2.6% to 2.4% range over the near-term”

FTN (Jim Vogel)

“With yield curves unflattening, better relative values have shifted toward slightly longer Treasury maturities


“Last week’s abrupt move toward a steeper curve really was a short-term reversal of over flattening through most of July”

TD (Gennadiy Goldberg)

“Every piece of employment data will now be even more closely scrutinized, with investors attempting to gauge whether wage pressures (the missing piece of the labor market puzzle) are building”


“This has the potential to increase volatility in the Treasury space, with any surprise in wages now inextricably tied to the market’s timing for the first Fed hike

Source: Bloomberg

*  *  *

We leave it to Scotiabank's Guy Haselmann to conclude:

Markets recently have had a perverse reaction to economic data.  Equity markets seem to fall on strong data and rally on weak data.  In such, it seems fair to conclude that Fed accommodation continues to trump economic fundamentals.   Therefore, it may be fair to conclude that a tepidly growing economy is likely best for risk assets.   At the moment, this might be consistent with the Fed’s forecasts of modest improvement that will allow the FOMC to withdraw accommodation gradually and methodically.  However, the odds of such a convenient outcome are small.


Market volatility is highly likely to rise, because the FOMC’s future path will likely deviate from current forward pricing.    There is a wide range of economic projections amongst market participants who will be forced to reassess and shift positions as data unfolds. Fortunately for the Fed, after QE ends in October, the FOMC will have greater flexibility.


However, the Fed will have difficulties controlling market gyrations and its potential loss of credibility from troubles that are likely to arise from its exit strategy. If the economy strengthens, markets will be forced to price in a more aggressive Fed as consensus builds that it is ‘behind the curve’.  If data weakens, the market will worry that the Fed has no ammunition; and regardless, markets would question QE’s effectiveness. Neither outcome is good for equities or credit, but long-dated Treasury Bonds would benefit.  I maintain my prediction of a sub 3% 30 year by year end. 

*  *  *

Trade accordingly.

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stinkhammer's picture

potential loss of credibility; ha!  what credibility??

hedgeless_horseman's picture



ZH (hedgeless_horseman)

"Short term, only the central planners at 33 Liberty really know what is supposed to happen next...everything else is just pure speculation."

Winston Churchill's picture

You have more faith in them than I do HH.

Seems like they have been driving by the seat of their pants since 2008.

I see no evidence of forward planning at all , just reaction as each crisis develops.

Care to critique that ?

hedgeless_horseman's picture



Since Nixon took the US full-retard it has been all about keeping two turds (USD and GBP) afloat by flushing other turds as needed...Argentina going down the sewer for the third time!

Oceania has always been at economic war with the world.

F0ster's picture

Bernanke took us full retardER by defaulting on literally the planet I.e. every US Dollar holder with QE. It was that or US was dead. US declared world financial war with QE

Manthong's picture

What a hoot reading about how the farm hands continue to try and put lipstick on a pig.

decon's picture

I think you're correct.  No grand central scheme, no long range plan by "them".  The central banks are playing this by ear and making it up as they go.  Sure, some individuals and organizations have more influence than others over the world's political/economic ecosystem but no individual or group can even remotely control this juggernaut on a very long time horizon.  In the end what we get is based on billions of organizations and individuals acting on the emotions of fear and greed.

LawsofPhysics's picture

Correct, stop trying to predict "market" moves and simply try to recognize the truth, that there is no public market for true price discovery...

IronShield's picture

Of course, the Market is manipulated and so are precious metals.  Got it.  Now how can I make money with that?  Rrrriiiggghhhttt... 

Toolshed's picture

"Short term, even the central planners at 33 Liberty really don't know what is going to happen next...everything is just pure speculation."


Thought Processor's picture




Revert to mean?


That's just crazy talk.


Its Only Rock N Roll's picture

rates are never going to hiked WILLINGLY


NoDebt's picture

I sympathize, but you watch what happens next year.  Doc and I already have a sandwich bet on this.

Every so often they raise rates in an attempt to convince themselves they are not in a liquidity trap.  Shortly thereafter everything goes haywire and they drop them again, thus proving perfectly the mess they are in.

NoDebt's picture

Great, Goldman retail reco agreeing with me.  I should just send Doc the sandwich right now.  I'm as good as dead on this bet now.

Headbanger's picture

Just STFU fonz you Goldman shit ball

fonzannoon's picture

So, just to be clear, I am probably not going to stop posting because you can't play in the sandbox nicely. So why don't you come down to NYC and do what you do best, walk into Mt. Sinai and eat that guys exploded asshole.

Dr. Engali's picture

I think somebody likes you..... I'm guessing you two aren't facebook friends. 

fonzannoon's picture

just remember you are a bankster too. he could hit you at anytime with several words strewn together like "homojerkface"

there is just no way to prepare for it.

Dr. Engali's picture

"Goldman foresees the Federal Reserveraising rates in the third quarter of 2015 and taking its funds rate all the way to 4 percent eventually,"


Yeah right, the squid just solidifies my case.

fonzannoon's picture

Doc i realize you have become a major importer of free  east coast sandwiches but whats the bet?

if we are talking about the fed raising rates by the end of next year and you want a 2nd sandwich i'd say they do raise em.

they are smoking crack with 4% though.

rbg81's picture

Exactly.  Anyone who thinks interest rates are going up hasn't paid attention to the last 34 or so years.  Forget the noise, the Powers-that-BE will do whatever it takes to keep interest rates going to zero (even negative).  

If they fail, then we are in uncharted territory.  The System will collapse because it can't keep all its promises if interest rates are allowed to float to [true] market levels.  And then the SHTF big time.

fonzannoon's picture

rbg81 fwiw the fed is going to actually raise rates. The end goal is to have some speculative high yield blow out, the long end of the curve stay low, and the short end of the curve move up, along with stocks obviously moving up. I'm not saying it will work, but thats the plan.

rbg81's picture

Fonz--Sorry, but I'll believe it when I see it.  

Personally, I would LUV for interest rates to rise to their true market level (which I believe to be 7-8% for the 10YR UST).  I think that would force us to live within our means and cure a great many social ills in the process.  But, in the short run, it would hurt the parasite clients of the Entitlement state, both individual and corporate.  And that won't be allowed if at all possible.  

And one more thing:   Aaayyyy....

fonzannoon's picture

I hear you. I think we all would love to see that. The question is can they raise rates and keep the long end in check and stawks moving higher. I think they will and it will culminate with faber and schiff jumping hand in hand off the empire state building.

spekulatn's picture

Talk about a funny visual.

Paging williambanzai7. williambanzai7 please report to the nearest courtesy phone. 


I think they will and it will culminate with faber and schiff jumping hand in hand off the empire state building.

ekm1's picture

There is no such thing as a bond or stock or FX market any longer.


All suspended. No real trading going on.


.......until final order.....

ekm1's picture



Energy market is the mother of all markets.



ThroxxOfVron's picture

The present constituion of government is effectively a financial repression and wealth expropriation regime administration.

Everything of value is being aggresively aggregated by the oligarchy.  

The resulting dearth of income and wages results in dependency which plays into the hands of the allied corporatists and statists.

The politicians and the politically connected financial/corporate elites are codifying production and consumption fiefdoms.

fonzannoon's picture

Ekm I know it's your opinion based on your instincts that there is no trading going on in the bond market, but just a heads up, there is massive trading going on in the bond market amongst institutional investors, hedge funds, pension funds, etc.

ekm1's picture

Nothing major that central command can't handle.

Those institutions need to keep people employed. Recycle and recycle just for sake of recycle


I've always said that there is RECYCLING going on, from computer to computer.

It's not 'investment intent'. Just recycling until there is some real yield and real trading

fonzannoon's picture

It's entities buying or selling with the hopes of making a proifit. Sure it's no threat to the fed, because in the end they are onboard with the fed, but within that framework thst is what is going on

ekm1's picture

The only hope right now is NOT losing money.


tickhound's picture

Naw... There's another Skywalker.

tickhound's picture

"Those institutions need to keep people employed. Recycle and recycle just for sake of recycle"

Now THAT is an opinion based on instincts driven by observable facts that I can get behind.

I'll alter it slightly... "Those institutions need to keep people employed. Recycle and recycle just for sake" of the CONSUMPTION end of an outdated economic equation.

In other words it's a make-work program... A glorified McJob.

Work vs Employment is akin to Money vs Currency.

Work and money are toast. Employment and currency keep this bullshit boat from sinking.

fonzannoon's picture

yes and even those guys are desperate for yields to go up, not explode, but go up. They need at  least the semblance of a real market, otherwise they are not needed at all.

ekm1's picture

concur with both of you

tickhound's picture

You hit on a broader topic and I had a reply that went on and on to the detriment of this thread... I'd love to dive into it but my own "duty" calls.

I'll hit back on this later. Later.

ThroxxOfVron's picture

Yes.  It is.  

-A really ugly new form that just happens to have control of the reserve currency and the world's largest military.

NotApplicable's picture

Anybody else having difficulty getting the pages to load? I'm not even getting error/maint. pages.

Sudden Debt's picture

cancel some pornmovie downloads in the background.

that mostly fixes it...

greatbeard's picture

>> cancel some pornmovie downloads





Sudden Debt's picture

Rates will go up when a coffee costs 200 dollars and "official inflation numbers" will be at 2%...

yogibear's picture

That's about right. The inflation rate will be low, according to the government and the Fed, but prices for everyday items will be multiples. 

One huge lying government and central bank organization.

PlusTic's picture

Hang these fukks from the FED by their toenails in a public square...

LawsofPhysics's picture

Getting harder and harder to support that skimming guys?

Sorry, no sympathy motherfuckers.


icanhasbailout's picture

Nobody really knows how the system will hold up under duress.

I can take an educated guess... it will fall apart catastrophically leaving all the actual assets in the hands of a tiny elite and a massive pile of liability which will be dumped on the tax slaves.


(Feel free to check back later and see how I did on this call.)