One argument for last week’s extraordinary plunge in bond prices, which I explored as something that might happen this time of year in one of my earlier Premium Posts, was that bond prices could get crushed by the supersized US treasury auctions planned for September and October as the government makes up for its inability to issue new debt during the debt-ceiling standoff.
While pointing out the concern to patrons, I decided in the end for my own investment purposes that the Fed’s termination of quantitative tightening and its return to reducing interest rates would likely offset the impact of the government’s sudden debt expansion. Evidence is solid so far that the ballooning treasury auctions have not been the cause of the sudden collapse in bond prices (rise in yields).
(I also got out before the carnage of last week.)
So what caused the bond breakup?
I believe the sudden change in the bond market since September 4 has been due to a few factors.
First, the violent momentum trade in stocks in the past week became the biggest stock rollover of its kind since 1999. The change in momentum trading means investors are defensively selling off growth stocks (stocks that have been rising on a bender) and rolling the money into value stocks (stocks of good companies that have remained underpriced compared to the rest of the market). That sea-change in market factors likely forced numerous managed funds (such as risk-parity funds that guarantee a certain ratio in stock values to bond values) to sell off bonds, whether they wanted to or not, just to maintain their promised balance between equities and securities.
Second, at the same time the momentum rollover was going on, corporations leaped into the bond market with their own sudden record bond issuances to fund future rounds of stock buybacks or refine current debt at lower rates. Inflated supply means raising yields to attract additional buyers into the market. Another way to look at that is that bond prices have to fall to attract buyers.