In 2006, 2007, 2008 and 2009 we saw 10Y bond yields surge into June only to peak and turn lower aggressively; and in 2010, 2011 and 2012 we saw a 'mini rally' in yields into June that was not sustained, so, as Citi FX's Tom Fitzpatrick notes, while we regularly hear the mantra for the Equity market of "Sell in May and go away" maybe we should have one for the Bond market - "Buy in June after the swoon."
There can be no doubt that the predominant factor in rising yields, increased market volatility, turmoil in emerging markets, rising peripheral European yields etc. over recent weeks has been the Fed but Citi still believes that the mention in the past weeks of "tapering" has been a "Kite flying" exercise by the Fed with the premise being to sell 'the markets' on the idea that reducing bond purchases was a “slowing of easing”, a “tinkering” not a tightening.
It appears it is not going according to plan and we believe the Fed has got its answer as to what will happen if they announce tapering and it’s not pretty and unless they back away from this 'less easing' path, this policy mistake will have a negative feedback loop in financial markets and the economy leading to the market “easing” again and sending bond yields lower once more.
Via CitiFX,
...
So the argument from the Fed is that tapering is a slowing of the easing process rather than a tightening process. While mathematically that may be correct consumers do not borrow from mathematicians or for that matter at the “Fed funds rate”
The simple fact of the matter is that starting with the employment numbers in May combined with the tapering rhetoric from the Fed this rate has risen 71 basis (low to high) points since 01 May. If pushing mortgage rates lower is accepted to be a form of unconventional monetary easing (given we are looking to recover out of the greatest housing downturn of this generation) then rising mortgage rates have to be viewed as a tightening.
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So to varying degrees we have seen a rising 10 year yield into June in the last 7 years. The most impulsive moves were seen in the four years 2006-2009. Those moves had characteristics more like what we have seen this year and in all cases we saw dramatic moves lower after a surge higher into June. Three of those four surges peaked between 11 and 13 June.
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- 2006: 10 year yields surge and hit a peak of 5.25% on 28 June. That level is never again revisited that year and by December the yield had fallen to 4.40%
- 2007: 10 year yields surge and hit a peak of 5.32% on 13 June. That level is never again revisited that year and by November the yield had fallen to 4.05%
- 2008: 10 year yields surge and hit a peak of 4.27% on 13 June. That level is never again revisited that year and by December the yield had fallen to 2.03%
- 2009: 10 year yields surge and hit a peak of 4.00% on 11 June. That level is never again revisited that year and by October the yield had fallen to 3.10%
- 2010: 10 year yields were heading lower but have a short term bounce to peak at 3.42% on 03 June. That level is never again revisited that year and by October the yield had fallen to 2.33%
- 2011: 10 year yields were heading lower but have a short term bounce to peak at 3.22% on 30 June. That level is never again revisited that year and by October the yield had fallen to 1.67%
- 2012: 10 year yields were heading lower but have a short term bounce to peak at 1.73% on 11 June. A new trend low is posted at 1.38% on 25 July. The yield finishes the year at 1.75%
Bottom line the Fed is singing “Everything will be alright” while the market is singing “Hotel California” (You can check out anytime you like but you can never leave.)
Tapering will come, tightening will come but the “patient” is not yet healthy enough to take this shock just yet. To push this prescription at this point risks a relapse.