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Flashback to Post Financial Crisis Volatility


After nearly sixteen weeks of watching the 30-yr U.S. Treasury consolidate and bounce within a range, the Fed action in June was the catalyst needed to break out. We not only broke through the lower end of the yield range but continued to push through 2% as well. The recent rally in rates can be explained by a slew of factors: The Fed talking about tapering, the COVID-19 Delta Variant, thin summer volumes, pension buying, a short squeeze, softer macro-economic data, global yield differentials, and strong seasonals. We question if the market is now conditioned to react to bad news relating to the virus and default to a more negative outlook as a result of the uncertainty experienced throughout the pandemic.


30-yr U.S. Treasury Breaks Out of the Range


Looking Back: The 30-yr U.S. Treasury during the 2009-2011 period highlights the push/pull dynamic between recovery enthusiasm and fears of recession. After a sharp sell-off in rates, we saw an 80bps rally followed by an 88bps sell-off. This was again accompanied by a 132bps rally and subsequently a 125bps sell-off. We find it interesting that the moves were very directional. We then rallied from 4.5% to 2.75% in a very swift run as the market believed we were going back into a recession, settling out around 2.50%. Keep this volatility in mind as we may see similar trading patterns in the future.


30-yr U.S. Treasury Post Great Financial Crisis


Looking Ahead: As we move forward, we will continue to have competing factors for rates. Beyond the virus ebbing and flowing and the speed of the economic recovery, we are faced with seasonals and the Fed’s future tapering of Treasury and mortgage purchases.


30-yr U.S. Treasury Seasonal


This is in addition to inflation – real as well as expectations – and throw in debt and demographics and we can quickly talk ourselves into a 2009-2011 period of rate volatility.


Core CPI YoY


10-yr Inflation Breakeven Rate


Bottom line: Volatility will be with us for some time due to contradicting market inputs. This is where patience, discipline, and active management can create great buying opportunities.


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