Two months of heavy wipe-down in the FI universe is now being neatly packaged in a critique of Fed communication confusion. We disagree. The Fixed Income market, although commonly referenced as the TLT, is a broad and diverse world. The breadth of devastation over the last 7 weeks is incredible. This was a sell off that provided essentially no "quality" to fly to.
Harking back to our long held criticism of the Ferguson Commission and Greenspan's "25bp at 2:15et every 6 weeks" gambit, its the CLEAR communication that is the problem. Market participants, from Iowa Stock Clubs to multi-B hedgies, act logically when guidance is "extended." In the "Greenspan Folly", he "promised" the path of forward rate increases and failed to consider the certainty with which bankers-shadow and light- could continue to supply credit into the wholesale funded system. Fast forward to the post credit super-cycle Fin Sys 2.0 and the Bernanke Fed bets the same forward guidance on the market will deliver a happier result.
At the same time, large banks have (due to both regulation and the extended low yield environment) reduced FI Desk capacity dramatically and reduced wholesale money funding exposure. This has created a sticky and rapidly seizing system. The customer side has morphed into a tricky stew of automated liquidity providers, small hit and runners (guilty) and Gigantor AUM monsters. Not exactly a market my economics professor would label "healthy"- deep, wide and resilient. The certainty that the low yield, low volatility scenario was here for years masked a bull market in leverage on the customer side as a yield chase. The mismatch dysfunction has exploded as the system attempted to gear down.
The melting ice that started the flood is the FX Reserve shift behind the real rate move (well explored by @exantefactor at Minyanville and further by @izakaminska at FTAlphaville. and right here by us) That the Chairman openly expressed confusion over this very movement when asked about it in the presser is not comforting. We anticipate still-er waters as the bodies float up over the rest of the Summer. BUT, if the pendulum swings to levering the inevitability of the return path, the flood could turn full Noah. Either way, don't listen to forecasters blaming CB mixed messages for the mess. This is happening because CBs have been saying too much for too long.