Bond Market Continues "Repricing"

The seemingly never-ending sea of red continues.  And for good measure, this one began with a bit of hope in the form of an overnight rally that got 10yr yields back below 4.50%. Not one moment after the official end of the overnight session, domestic traders started selling, pausing only briefly for the 9:30am NYSE open before taking yields to new multi-year highs in the 11am hour.  .

Like yesterday, there are no new or significant root causes for the weakness.  It's the same old story of broad, large-scale "repricing."  But what even is "repricing" in this context?  It's a term we've only dusted off a few times over the past 15 years.  It occurred in 2013 surrounding the taper tantrum and in 2016 after the presidential election.  Those were examples of rapid repricing to higher yields.

There is a more gradual version as well, like the pervasive rally that took place in 2014 as the market repriced expectations for European QE and in 2019 as global growth concerns collided with the trade war and an oversold bond market.

In all examples, "repricing" refers to a sustained move in one direction that requires no new surprises from typical fundamentals.  In other words, econ data didn't justify the scope or pervasive nature of these moves.  There was some deeper, underlying x factor that caused traders to identify a destination and then to proceed methodically in that direction.  The was abundantly clear in the first half of 2022--probably the single best example of a "repricing" event in modern economic history.

But here's the kicker: that repricing has been underway since August of 2020.  That's when bonds first began to lift off from the covid lows and when market participants first contemplated a future where trading levels weren't tied to covid case counts.  It's not as if the world knew yields needed to be over 4% at the time, but it was clear they needed to be higher.  In late 2021, we could similarly see that yields needed to be MUCH higher.

Now in late 2023, with 10yr yields already around 4.5%, I wouldn't agree there's as compelling a case for a repricing event, but that is nonetheless how the market is trading it.  It could be that it's a short-term affair in reaction to last week's Fed announcement, but only if next week's data is week.  Otherwise, it's just the market's way of getting in position to finally not be surprised by surprisingly resilient big-ticket data.