from Zero Hedge:
What is going on here: is it just more seller than buyers, who are frontrunning an epic curve flattening or even inversion as may well happen once the Fed launches its rate hiking cycle? Or is something else happening behind the scenes. We ask because in addition to the normal selloff in cash and derivative products, something far more dramatic took place in the repo market where the repo rate on the 2Y just suddenly plunged out of nowhere.
While most bond watchers are keenly focusing on the latest selloff in the long-end of the bond curve in general, and the 10 Year in particular beuase supposedly the Fed is going to hike “any minute now“, it was the 2 Year where the real fireworks are, and as can be seen on the chart below, not only is the nominal yield on the 2Y rise to the above the highest closing level of 2015 and the highest since April 2011…
… but just as importantly the yield on the 2Y TIPS is positive only for the first time since late 2014 and early 2015 when we had yet another imminent rate hike scare:
So what is going on here: is it just more seller than buyers, who are front running an epic curve flattening or even the inversion that may well happen once the Fed launches its rate hiking cycle?
Or is something else happening behind the scenes.
We ask because in addition to the normal selloff in cash products, something far more dramatic took place in the repo market where the rate on the 2Y just suddenly crashed out of nowhere.
Here is one attempt at explanation by Wedbush’ Scott Skyrm:
Almost out of nowhere, Repo rates in the 2 Year Note dropped dramatically today. Since the issue just settled two days ago, we’re too early in the auction cycle for it to become naturally special. We’re in the middle of the slowest week in the summer, so a general increased market activity should not be driving it. The Street hasn’t been actively squeezing issues since 2006, so that’s not the reason. My best guess is that some yield curve flatting trades were put on yesterday, expecting a grater probability of a Fed tightening in September.
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