This headline from the WSJ was certainly revealing. It attributes rationality to liquidity-besotted trading in the bond pits that has nothing to do with anything, except whether at any given moment the momo pack has gone student body-left or student body-right.
The months long decline in bond yields exemplifies investors’ belief that inflation likely isn’t the biggest problem facing the U.S. and global economy.
The yield on the benchmark 10-year U.S. Treasury note settled Tuesday at 1.208%, according to Tradeweb, up slightly from Monday but still down from 1.3% Friday and its 2021 high of 1.749% set in March.
That is to say, this 55 basis point dive was just that: A downward undulation driven by day-traders— and hours and nanosecond traders— chasing a rising bond price (and falling yield) just because it was going up, and because they could carry their position for free in the overnight repo market.
This free stuff for speculators stems from the fact that the Fed’s Big Fat Thumb has the GC repo rate pinned at 5 basis points, where it stands ready to take in trillions of idle cash if needs be. What a tantamount to zero yield in the repo market means, of course, is that momo traders will chase any rabbit that promises to generate a short-term gain because the cost of carry is, well, not a cost at all.