Debt Market Monitor (October 2021)

November 17, 2021

Although markets are typically hypersensitive to various influences, sometimes market reactions are delayed as investors digest an event’s implications for a post-pandemic economy. One such delayed reaction arrived just after the Federal Reserve (the Fed) meeting on September 21st and 22nd, as treasury yields surged back to levels seen in the middle of the summer. After taking the Fed’s hawkish tilt – telegraphing tapering and pulling forward rate liftoff expectation on the dot plot – pretty much in stride at the time of the meeting, traders went the other way the next day.
The yield curve, as measured by the gap between the two-year Treasury and the 10-year Treasury rates, had flattened after Fed Chief Jay Powell’s press conference, with the gap narrowing about four basis points (bps). A day later, the gap jumped more than 10 bps as the 10-year yield experienced its biggest one-day move since February and pushed above 1.4% for the first time since early July. It’s seen a ceiling of about 1.8% this year.
“Take a step back and think about how low yields are even relative to where we were in the first quarter of this year,” Zachary Griffiths, Wells Fargo macro strategist told Reuters. “We do have very high inflation; high economic growth forecasts and it’s really been kind of hard to justify where yields have been up to this point.”
The run-up in yields didn’t really start until just before stocks opened on September 23rd, underscoring the thought that investors should be wary of Fed day moves. A lot of short and long positions are unwound in a very short time right after the Federal Open Market Committee statement is released. However, by the next day, the market began to look at a global landscape where central banks, the European Central Bank excluded, are removing historically high accommodation.  
10-year Treasury yields moved on to 1.55% by the end of September, indicating the market is sensing an interest rate move by the Fed sooner than previously anticipated.