MBS Live Day Ahead: Comparing Post-Election Weakness to Taper Tantrum

"Taper tantrum" refers to the market's reaction to the revelation that the Fed would begin reducing the pace of its asset purchases in mid-2013.  For most of us, that's as bad as it gets for bond markets.  Even for those who lived through the brutal weeks in April 1987, the worst 3 days of the taper tantrum represented a more abrupt change in yields in terms of the percentage of gains erased compared to the worst 3 days in 1987.

It's scary to consider, then, that the past 3 days (Wed, Thu, and today) have actually seen a bigger intraday yield spike than the worst 3 days of the taper tantrum!  Caveats abound, however.  The following chart breaks them down.

First off, the "worse than taper tantrum" designation for the past 3 days relies on the use of "intraday" weakness, simply because we don't have a closing value for today yet.  If we were to close at levels in place this morning, the 2013 taper-tantrum would keep its title as the king of weakness.  

Then there's the matter of the surrounding trading.  In the run-up to the taper tantrum, there was significantly stronger momentum initially compared to unevent, slightly weaker momentum in 2016 (red dotted-line boxes).  Moreover, the 2nd phase of the respective moves saw a massive shift toward weaker momentum during the taper tantrum WELL before the 3 days in question.  By comparison, the 2016 momentum shift is much less consistent.  

Simply put, 2013 was the ultimate sucker punch.  Markets were set up with a false sense of positivity by the end of April 2013, and everything was abruptly ripped away, seemingly without warning.  In stark contrast, the past 3 days of weakness lie at the tail end of more than 4 months of solid uptrend in rates.  Indeed, "defense against the uptrend" was already the most appropriate strategic stance from a market-watching standpoint.

Bottom line, the past 3 days have technically covered more ground from trough to peak than the worst 3 days of the taper tantrum, but the taper tantrum remains a far more insidious move overall.  Only time will tell if the subsequent weeks will make this a closer comparison.  10yr yields would have to hit 2.5%, or thereabouts, before any legitimate case could be made that 2016 is in the same league.

All that having been said, the current move has nonetheless been awful.  The fact that we can even begin to compare it to the taper tantrum puts it in a league of extraordinary sell-offs that have rarely been seen in modern bond market history.  It's worth noting, however, that most of those extraordinary sell-offs were precipitated by the recent juxtaposition of long-term or all-time low yields.