Is the currency movement of the past month a tell of 'who' is driving this selloff in longer duration bonds/notes? Think about it... USD was cheap, bonds were expensive. What better time to redeem your expensive long duration fixed income products back into dollars on the cheap. Does anyone else here think its China driving this bond/note selloff, in response to our protectionist agenda? Selling bonds and moving the $$ back to currency? If so, the next step is to dump the currency. I'm not buying the inflation argument, since inflation rates were actually higher 6 months ago when yields were closer to 4.5%.
Doing a bit more reading.. perhaps this convexity hedging of mortgageback securities is the true explanation. mccurto is always making good posts in the other big bond trading thread concerning order flow. I guess +20% m/m foreclosures is creating a repricing of mortgageback risk, forcing the long MBS funds to short treasuries to hedge their positions, offsetting risk. And as this hedging accelerates, it begets more selling. Now to figure out the interaction between bond/note options and the 'short vol' position MBS buyers put themselves in (due to mortgages having a prepayment option). Lots to learn. Maybe China/Japan is the next step, taking long yields to seriously high levels (7-9%).
I question how anyone can NOT buy the inflation argument considering energy, food and taxes aren't included in the CPI. Do you feel like you're "only" spending 4-6% a year more than you were in '06, '05, etc? Ansare
Not disagreeing that inflation is out of control. But I question the validity of the inflation -affecting bonds- argument considering that inflation #s y/y I believe were much worse last yr than this, and the yields on the long bonds/treasuries were near all time lows (last yr) despite this. I like the convexity hedging argument a lot more. Makes sense. As the bid drops out for mortgage backs (which is a HUGE market), the bond funds hedge exposure by getting short treasuries. and as the selling gets worse, it stimulates even more hedging. selling begets selling. A skyrocketing foreclosure rate must be pushing this whole thing. Let me ask you a question: would you buy mortgage back securities that only are priced to a 1% yield premium vs long treasuries that carry no default or prepayment risk in the face of 20% m/m + foreclosure rates? I'm absolutely convinced the next leg of housing market undoing will be the collapse of demand for this MBS debt (causing yields to skyrocket, thus lowering affordability and demand even more).