SMCJB 

Can you imagine the impact that scenario would have on the US deficit? Which raises the question would the Fed allow that to happen?

Yes and no

It used to be a conspiracy theory that the folks who compile the inflation data are intentionally understating actual inflation, but now this is largely accepted as fact by many professional economists and investors.

They use tricks like the "trimmed mean" and hedonics. So one category that sees a 10% rise in prices is simply tossed (I mean "trimmed") from the data while another category is massaged down from 10% to 2% because you have more pixels in your TV, or a faster load-rate for the ads on your iPad.

Seriously look into the hedonics adjustments. They basically inply that a TV today costs only 1% of what it cost a generation ago. No joke.

Anyway, by consistently understating inflation, the government that calculates inflation actually helps out the government's finances. Because the inflation liability (cost of living adjustments on government pensions, entitlements and social security) is way understated, while the inflation asset, or income stream from taxes grows at the same rate of actual inflation.

Pretty clever, huh?

But yeah this is why no one believes the official government inflation data anymore. It's like trusting and alcoholic to tell you how much he's had to drink every night.


EDITED TO ADD:
Regarding your comment about the Fed, you're absolutely right that they will never allow things to spiral too far out of control in the bond markets. Citing threats to the recovery, financial stability concerns, tougher credit conditions for homebuyers, consumers and small businesses, the Fed will have plenty of euphemistic excuses for bailing out an over-indebted and insolvent Treasury. But I do expect the market, eventually, to test them and find out just where that pain point (or strike price for the Fed put) really is

Interesting that in the last year and a half while the Fed has been buying bonds to "stabilize" the market; MOVE has actually gone up.
If the rate of change of the Fed BS decreases (eg less stabilization) will MOVE go up further?

"Fed BS new ATH - MOVE new recent high

More of the same. Fed's balance sheet printing new all time highs, and bond volatility (MOVE index) printing new recent highs.

This remains one of Powell's nightmare charts as Fed can't control bond volatility..."

SMCJB 

Can you imagine the impact that scenario would have on the US deficit? Which raises the question would the Fed allow that to happen?

Yes but remember that the 10 year is only at 1.6% right now. At some point it becomes a problem, but I don't think they're there yet. I've seen many people estimate that at 3% we have a problem.

At the moment I'm more concerned about a Feb 2018 like move occurring. If the increase in rates continues at the pace it has the past week I can easily see volatility in treasuries getting out of control, and liquidity in the markets pulling again. Not that I'm saying I think it's going to happen. Just that when I look at possible risk events for treasuries in the near to mid future I see plenty of problems hitting before the US deficit becomes a serious problem.

Market has firmed, and I remain constructive going into next week. Once again it's the positioning story (everyone is short bonds, some will be forced to cover or reduce risk) as well as near-term supply dynamics and some cyclical factors that inform my view. The supply and cyclical factors will shift bearish again come early December but until then I will continue to favor longs.



Price action is also supportive with ZF breaking out of a basing pattern on the hourly and ZN putting in what looks like a good double-bottom on the daily charts. This kind of price action suggests to me that pullbacks should be bought.

ZF, 120 min:


ZN, Daily:

....aaaaand I just dumped the last of my (small) long into this morning's rising wedge because I just can't stand wedgies




Hopefully I'll get an opportunity to reload at a more comfortable entry point

Edit: obviously early here with my exit. Possible failed breakout / bull trap on ES overnight and renewed lockdown fears in Europe have created a strong risk-off tone in the markets today. Crude off sharply as well. My prior plan had been to re-enter longs down around VWAP but I'm not sure if we'll get back down there. So, sidelined for now...

I think we might be so concerned about the short term direction of interest rates that we're missing a potentially more important story about the liquidity side. There wasn't many economic releases this week, but we still had a decent amount of volatility. Especially when Austria went back into lockdown and Germany said they're not ruling anything out. That was a pretty massive move overnight, and that led to a slippery options expiration Friday session. We had a hawkish move when the White House said they're going to tackle inflation, and we had other moves when Fed speakers were talking.

I am very concerned about the latent liquidity in the treasury market right now. What they're showing on the DOM at around 3,000 lots per level in the 10 year is ok, but when you see how much actually trades it's pathetic. If that's what they're doing now, how is this market going to function when we're getting real rate normalization?

You bring up a good point, as bank balance sheets haven't grown nearly as fast as the Fed's, so the moment the Fed start's withdrawing liquidity and buyside accounts lean on the street to provide more balance sheet, things will get very sloppy out there in Treasury-land

Just listened to this excellent 3 part (each almost an hour) CME Webinar on the STIR (Short Term Interest Rate) Futures complex available to trade at CME. Probably something here for everyone. I personally learnt a lot about the pricing of SOFR futures and their relationship to Eurodollars (which was mostly in part 2).

https://www.cmegroup.com/education/videos/archive-short-term-interest-rate-futures-webinar-series.html

ZB left the up swing on 11-15 and backtested the channel on 11-19.
AB=CD of this down move would indicate a target at 157-19 which is also S3 this week.
ZB doesn't often go to S3 in a week so perhaps it takes a few days to get there.
Broke the lows today of 11-17 and 11-3.
Next low is 10-21 ; just a touch lower than the AB=CD target
ZBZ21_FUT_CME[M] 60 Min #17 2021-11-23 14_25_12.141

Today's headlines about this new South African variant came out of nowhere, catching a lot of people off guard. It was squeezy. Thin, post-holiday market conditions certainly exaggerated the moves.

One thing that has been very clear for a while now is that the "crowd" is underweight fixed income and / or short duration. What isn't clear to me is which part of the the curve those shorts were concentrated in.

If you were betting on a more hawkish Fed, you were probably short the front end or in bear-flattener curve expressions, which have done quite well in the past few months, and you can still book some decent profits here. But if you were short the long end or in a steepener, based perhaps on the view that inflation would be higher or more persistent than expected, you may have actually lost money, despite being "right" on your fundamental call. I suspect that a lot of weaker-handed players found themselves in this camp. The typical retail futures trader, for example, isn't selling Eurodollar calendars. He's more likely to just short a bond contract or two because that's where you get the most bang for your buck (max DV01).

Since most money managers, financial advisors etc measure performance on a monthly or quarterly basis, let's take a quick look at where we are since the end of the last quarter.

° EDM22 (June '22 Eurodollar contract) is currently down 22 basis points (price) from its Q3 (Sep. 30) close
° ZT is down more than 10/32nds from its Q3 (Sep. 30) close
° ZF is down 29/32nds from its Q3 (Sep. 30) close
° ZN is down 12/32nds from its Q3 (Sep. 30) close
° ZB is UP more than 3 3/4 points from its Q3 (Sep. 30) close! Yikes!

With only two more trading days in November I wouldn't be surprised to see some continuation of this move. Whenever you see a big range-expanding green candle closing on its highs, it's a pretty good bet that the move ain't done yet and has at least a little more to go. Month-end could add a sense of urgency for underperforming money managers who don't want to have to explain to their clients why they're still short here.

Hope you guys all did OK today