Earlier this Spring, we warned that shorting in a zirp world was a difficult task. Most that opted for "rate normalization" in the higher realm had the good sense to hold long duration against it. The Taper and FG led to an historic shift where open interest shifted to the "Greens" in Eurodollars. Participants remained confused as to tomorrow but confident in their understanding of 2 years from now.
All that is being tossed in the boneyard now. The list of explanations for why the bond market is rallying is longer than Ryan Seacrest's to-do list. A short squeeze, Europe, Russia, Pimco, the weather....its a mulligatawny of "This wasn't supposed to happen" analysis. It is what it is.
2 things stand out for us. 1) The calibration of Fed policy without LSAP is not overtly accommodating. FG works to harden the stasis in markets and attenuate the present environment. 2) Participant ideas of "Normal" remain highly skewed by the 70s-80s experience. As the great disinflation apexed, people associated normal with levels attached to the correction of an anomaly. Prior to the 1960s, low growth and low inflation were common outside of global war. The cleansing that ripping through the term structure now should provide fertile planting ground for new ideas about the level of rates this Summer.