Treasury bond yields do not tumble 35 basis points in the space of a few minutes every morning. There is no possible explanation for such a fall in the economic data that normally move the bond market, so yesterday’s sudden plunge in Treasury yields, partially reversed yesterday afternoon, suggests that the market pathologies we all grew to know in 2008 are returning.
That alone is enough to spook anyone investing in equities. Such a fall in such a liquid market implies someone, somewhere is under stress. Much like the “flash crash” of early 2010, which presaged a long period of volatility before the post-crisis rally resumed late the next year, it is a symptom of distress that cannot be ignored, even if the immediate effect on prices can quickly be reversed. The broader picture suggests the conventional wisdom is about to face a severe test. The end of quantitative easing bond purchases, due later this month, was always billed as a moment of risk for securities markets, even if QE has, as promised by the Federal Reserve, been tapered off very gradually. But the problem was supposed to be that bond yields would suddenly rise, once their support had been removed. There was no space in this world view for yields to fall, and certainly not to the 1.86 per cent level they briefly hit yesterday morning.
Bear in mind this is getting close to the 1.63 per cent that the 10-year Treasury was yielding before the Fed embarked on “taper talk” in May last year. Yields could not have come down this far without deep unease about the health of the global economy – even if the suddenness and severity of the morning’s movement will require a deeper explanation.