bond market signals a policy error. But which?

What does the bond market say?

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story this week is ties. We’ve seen some of the wildest movements since the pandemic and what makes them so complicated is that, to some extent, they came out of nowhere, with no actual trigger triggering most of them. And the ones with the triggers were surprisingly cool.

1) Long-term US returns returned to 1.55% after a test of 1.70% along with a reversal from 20 to 30

2) UK yields are skyrocketing, there is even talk of some expanding midsize companies.

3) RBA gives up control of the yield curve at a Soros moment

4) Canadian front-end jumps on BOC’s surprise

5) Italo-German spreads are emerging

It could continue because price action just touched above all global sovereign markets this week.

In the big picture, we still have long-term returns well below inflation and well below target, despite initial price increases. For example, a June FOMC rally is priced at 92% and the cone won’t even execute by then, assuming the $ 15 / b monthly pace occurs in minutes.

So what does it matter?

re are two schools of thought and one is that the Fed will be too aggressive and the other is that it will be too late.

ZeroHedge makes the case because the Fed was too late and was then forced to make an overly aggressive raise, citing former PIMCO CIO Mohammed El-Erian.

“A late and partial response initially, followed by a further tightening of the recovery, would be the biggest monetary policy mistake in more than 40 years,” El-Erian said, adding that it would “unnecessarily undermine the economic and financial well-being of the United States. ». . “Also sending” avoidable waves of instability throughout the global economy. “

other idea is that the Fed will overreact to transitory inflation. That they will walk too far in 2022 and 2023 only to find that it has been transitory the entire time. Prices will drop and inflation will return to the post-GFC range of 1-2%. Instead of letting inflation run out and re-anchoring inflation expectations, they will eliminate inflation and consolidate Japan’s interest rate policy.

Read also dollar maintains the advance so far in European morning operations

I lean more to the latter idea, if only because we’ve seen a few episodes where good economic data or high inflation data has been met with drops in long-term returns. change of central banks this week and the last one is treated in the same way.

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