By Sunny Oh
Some market participants were unimpressed by the Fed’s nonchalant tone, noting that senior central bankers like Kansas Fed President Esther George kept repeating that higher bond yields reflected improving economic fundamentals and were therefore not a cause for concern.
Thursday’s moves helped to drive s elling in equities , with investors repricing those investments as rates jolt higher. The Dow Jones Industrial Average, /zigman2/quotes/210598065/realtime DJIA +1.06% the S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.49% and the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +2.32% all finished sharply lower on the session.
Market participants also suggested yields were moving beyond fundamental forces, and that inflation fears weren’t enough to explain why rates were moving up at such a ferocious pace.
“A lot of this move is technical,” Gregory Faranello, head of U.S. rates at AmeriVet Securities, told MarketWatch.
He and others suggest the yield surge may have been a case of selling causing more selling, as investors caught offsides were forced to close their bullish positions on Treasury futures, in turn, pushing rates higher.
Ian Lyngen, a rates strategist at BMO Capital Markets, pointed the finger at so-called convexity hedging.
The idea is that holders of mortgage-backed securities will see the average maturities of their portfolio rise in line with higher bond yields, as homeowners stop refinancing their homes.
To offset the risk around holding investments with higher maturities, which can increase the chance of painful losses if rates rise, these mortgage-backed debtholders will sell long-term Treasurys as a hedge.
Usually, selling associated with convexity hedging isn’t powerful enough to drive significant bond-market moves on their own, but when yields are already moving swiftly, it can exacerbate rates swings.