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Let's talk bonds.
Because they didn't do great the last couple days and people are taking that as a confirmation that they're dead forever.
But I don't think that's what we’re seeing.
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Because they didn't do great the last couple days and people are taking that as a confirmation that they're dead forever.
But I don't think that's what we’re seeing.
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Okay so people like bonds because they're super liquid. You can basically always exchange them for dollars, whenever you want.
They are also relatively tame with regard to price movements.
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They are also relatively tame with regard to price movements.
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Yes, of course, you can take more or less risk on the curve and do some cute plays there, but even those moves happen slowly (or, if quickly, generally in your favor), so broadly speaking they are convertible to dollars in a highly predictable way.
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This predictable convertibility to cash is what makes them an ideal reserve asset: even if you get a little spicy in playing with the curve, those funds are reliably going to be there if you need to reach for them.
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As a (favorite) aside: this is why BTC is not yet a suitably reserve asset - it is often subject to immense liquidation pressures right when you’d want cash, so it's not a practical (because it’s not predictable) way to store cash, even if it is a decent speculation.
Anyhow…
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Anyhow…
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Sometimes people need that cash.
And when they do, they sell their (highly liquid) bonds.
That does move the price down a bit, BUT because the market is so big and liquid, not overly much (i.e. if a bunch of people need to get liquid, this isn’t a 30% price drop).
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And when they do, they sell their (highly liquid) bonds.
That does move the price down a bit, BUT because the market is so big and liquid, not overly much (i.e. if a bunch of people need to get liquid, this isn’t a 30% price drop).
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This is part of why the Fed gets worried if the price *does* move too fast (March) and steps in to support it — bonds moving too fast can cause some explosive solvency issues since everyone is relying on them not to.
The Fed is making good on the implied promise of liquidity.
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The Fed is making good on the implied promise of liquidity.
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Being massive and liquid is the only way to provide that feature - small markets see wild price swings when participants seek liquidity in unison. Doesn’t hurt to have the Fed backing it up either.
Bigness and liquidness are what make USTs a great place to park cash.
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Bigness and liquidness are what make USTs a great place to park cash.
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Bond selloffs do happen, both as an expression of a view (“reflation will make rates go up”) and also just because people need liquidity (“oh crap we need cash to cover these positions”), which means economic context (“macro”) is key to understanding bond price movements.
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Now tell me: in the context of the last few days, do you suspect the move in bonds was due to speculators suddenly becoming even more reflation-bullish than they previously were, or was it market participants needing liquidity?
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They say before a tsunami hits, first the whole ocean recedes and there’s like an extra half mile of beach and an eerie calm.
And then you see it: a towering wall of water.
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And then you see it: a towering wall of water.
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