Imaginary Axis

A vortex in fluid dynamics is the region where the flow is mostly a spinning motion about an imaginary axis. The collapse of Western Civilization is allegedly at hand because a "Bond Vortex" is forming at the 2.2% level in the 10 year Note. The catastrophe revolves (get it?) around some pedestrian notions of MBS convexity hedging attached to long held fear and aversion to LSAP monetary policy.
Disaster film pitch GO: The Fed tapers off POMO schedule and Note rates cross the 2.2% "line in the sand." This causes an unheard of amount of MBS convexity, duration and "Shit's broke" hedging that spikes rates, breaks the economic expansion and sucks the SP Index downward. We've talked to Bruce Willis and we'd love to get Affleck on board.
Well, never mind that the "vortex" in the other direction-lower rates and reduction in 10 year theoretical equivalent supply was a primary positive of LSAP; the present MBS distribution is pretty smooth (i.e. no heavy skew). Also the vast majority of the product resides on the balance sheet of an institution that isn't marked to market and doesn't hedge. Now don't get us wrong, we love a good convexity blamed air pocket in Notes and Eurodollar strips, but the "Mortgage Boys" are always a flamboyant moment from the end of a move. The Vortex Story implies that no one will be be around to carry better (higher seems a misnomer) yielding securities at 0-negative finance rates.
Our opinion is CBs around the world have embarked on a flawed policy goal- Stability. A New Wave Central Banker's preferred metric of stability is tight spreads and low volatility. To the extent they can produce the former the latter entrenches itself in market participant behavior. However, when markets adjust back toward the natural state of "movement" the increase in the artificially suppressed metrics scares the bejeezus out of everyone. Here's a tip, every time the capital markets adjust its not a crisis and the Bond Vortex spins around an imaginary axis.

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