Bond yields rally on 8220 wrong 8221 reasons

You know there is something inherently wrong with the markets when each of the few recent rallies week was strictly caused by the Federal Reserve; FOMC minutes and comments from Dudley/Kocherlakota on of Oct 8^th and today’s comments from St Louis Fed’s Jim Bullard suggesting the Fed ought to consider delaying the end of QE.

The last time markets were persistently and strictly boosted by policy makers’ remarks was in October 2008 as conflicting remarks from the US Treasury regarding the announcement of TARP program to recapitalise ailing banks.

It is no coincidence that during the current 2-week lockout period preceding the Oct 29 Fed meeting, during which FOMC voting members are banned from speaking publicly, non-voting member Bullard expressed the possibility that the Fed may not end QE later this month and remain its asset-buying spree.

The ensuing plunge in global equity markets enters a worrying phase as a multitude of fundamental catalysts join deteriorating technicals and increasingly forced selling by hedge funds, speeding up selling momentum.

Crumbling catalysts

Today, Eurozone periphery fears come calling as Greece’s faltering government is at risk of falling off the IMF bailout track, which sent Greek bond yields to nine-month highs. Greek yields short up by 14% above their German counterpart, driving up the rest of periphery yields and spreads across the board. See chart below.

Monday & Tuesday highlighted Germany’s economic machine is in the grips of Eurozone recession.

Wednesday was a reminder that US economic figures were not immune to disappointment.

Today’s 27-basis point jump in 10-year treasury yields is an integral component of the ensuing intraday rally in US and global equity indices, courtesy of Bullard’s remarks raising the possibility that prolonging QE will prove positive for growth. But if global yields become “supported” by a resurgence in Eurozone yields, then markets will require actual QE from the Eurozone via an implementation of Draghi’s OMT readiness of 2012, while a mere prolonging of the Fed’s program will prove worthless as a central bank trick for equities and market psychology.

It may have been a surprise two months ago on here when called for bond yields to hit 2.10% from 2.30%, but it is no longer so.