Do you want to be a bond holder or a bag holder?
Tomorrows higher yielding bond/note trashes the value of todays lower yielding note/bond.
The fed raising short term rates is forcing sales of short term note bag holders. Those who own yetserdays lower yielding note see its falling price and dump it . Inflation (higher rates) are a bond holders nightmare.
So, in the above environment , do you want to shift to equities. The thrill is gone. The fed is late but is removing the punchbowl, miscalculating, and is sure to bring on a recesssion.
Flight/relative safety is a component and aligns with economic fundamentals.
The oncoming recession and present day fed tightening is sure to overshoot and kill all inflation. Yields further out .....10 to 20 etc.. respond to low inflation expectations with a note/bond rally. A bond holders dream,falling interest rates (no inflation/deflation) in the instrument they own.. Capital appreciation swamping the falling yield.
I dont know, but I assume big money mandated to fixed income must slide thier maturities back and forth say, between the 2 and 10 year note.
Inflation, time, and default are the cheif risks and a relative decision is made between the 2 and 10 year.
Recent history, going back to Greenspan(Greenspan conundrum) highlights what happens further oit on the curve can frustrate the fed.
Wasnt it just last year Yellin declared the risk premia( yield beyond fundamentals) was to low
And that rates in that part of the curve could increase dramatically with US taper and divergent monetary policy. That has not playedout at all.
Remember December, the rate hike, things were not obvious as hindsight is now.
There was a big discounting of the feds move in the 1,3,6 month notes, eurodollar futures and fed funds futures. These pretty much topped with the fed action/hike, sold off a bit and rallied furiously with oil/China/fed fading.
So, of course there is potentially some confusion possible where the fed raises
rate and entire curve rallies.
