Morgan Stanley Explains The "Real Drivers" Behind The Rout In Treasuries

Explanations for the recent spike in yields, the Treasury curve bear-steepening and increased term premiums include technical drivers (like US Treasury market supply, investor positioning adjustments, CTA selling, and agency MBS-related negative convexity flows) and fundamental drivers (like fiscal sustainability concerns and the exploding budget deficit, the Bank of Japan exiting YCC, the rising stock of T-Bills and the Treasury's intention to increase auction sizes, and stronger-than-expected growth) but as Morgan Stanley's rates strategist Matthew Hornbach writes in a recent note (available to pro subs), the FOMC rarely enters the discussion.

And yet, Hornbach says that without the Fed's more hawkish reaction function to recent growth and inflation data, in the context of a deeply inverted yield curve; other technical and fundamental drivers would not have contributed that much to higher Treasury yields.

So why does the Fed get discounted in these discussions? Two reasons: