Yields freefall, markets meltdown – Aug 18th 2023

Bearish sentiment weighed heavily on risk assets this week after inflationary pressures out of the retail sector surprised markets with a hot July sales print of 0.7 vs a 0.4 forecast. Some of the Fed’s heavyweights went all hawkish in their speech, leaving the FOMC squad divided in their July minutes. The downtrend got a rocket boost with China’s frosty demeanor further putting the chill on things and markets sprinted for cover, scratching their heads once again this year. Long rates swung 30bps as the curve bear steepened and pushed equities down a gut-wrenching 7% by yesterday, erasing much of the choppy recovery we saw in July.

Let’s not kid ourselves, August is no walk in the park. With market liquidity as thin as a credit trader’s patience, volatility is again out stretching its legs. Navigating through this mess is like trying to sail through a storm with a paper boat. Owning long duration ahead of the record supply expected to continue eroding treasury markets keeps painting a grim picture for risk assets, particularly those richer names in the “quality” aisle. So much so, that fast money participants have re-loaded on short positioning while buyers remained scarce all week long.