Since April

Last week's adjustment to the forward term structure was significant on both a cyclical and secular time frame. The devastation of the Spring and Summer to the 30+ year secular Bond Bull was a watershed event. The 100bp correction since the Shutdown is the second chance participants tend to fail to recognize as such.

Front Eurodollar contracts made new Life of Contract (Historical) highs (low implied yield) while deferred contracts - despite heavy doses of Forward Guidance - have failed below the late April peaks. This is a classic non-confirmation. Optimal Control Models and Forward Guidance are faced with a new dilemma, Mr Market is doesn't wait.

The best examples of the term adjustment are seen in the EDU14 and EDU15 (or EDU16) weekly charts. On a Cycle basis, the change is aligned with the recent cluster of better than expected data points. On a Secular front, the March 2012 to March 2013 "yield grab" seems to mark the point in time when, after 30 years of denial, participants finally threw up their hands and reached.

We continue to believe that the fashion in which rates adjust upward is/will be more important than the reality that they are. Funding pressure and "financial stress" metrics jumped into June far quicker than tolerable. The collateral based regulatory System 2.0 may turn out to be far more inelastic than the non-securitized money system of old. Optimal Control or not, we think we're finally going to go find out.


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