At one point in time (and perhaps to this day) if you’d asked the average bond market watcher to name the top 3 months for volatility, October would definitely have made the list. There are several potential reasons for that–the biggest one being that for more than a decade, bonds have been far more likely to rally for a few months at some point in the middle of the year and sell off (or at least end the positive trend) heading into the end of the year.
What are some potential reasons for October filling this role? First off, it’s really not any more guilty than any other Q4 month due to the surprisingly cyclical nature of the long-term bond rally. In fact without major monetary policy changes from the Fed in 2013 and ECB in 2014, those two years would have had a better chance to have their own blue rectangles in the chart above. That would have put the total at 9 or 10 years out of 11 (depending whether or not you want to count 2011).
Beyond the cyclical argument, October is the first month of a new fiscal year for the US government. It’s the first month where markets are fully back in action after the summer months. And it’s the last month before the apex holiday months of Nov/Dec. In other words, it’s uniquely situated to push back on summertime momentum that was accelerated by illiquidity and to serve as the year’s last glimpse of full-fledged liquidity Nov/Dec add their illiquid distortions and/or legitimate position squaring.
We could go on… Mid-October is one of the 4 “earnings seasons,” which can always add volatility. This often lines up with new corporate bond issuance as well (which we know is something that can put pressure on bonds in general). October 15th is the 2nd tax deadline, which can see a small glut of new money entering the managed fund sector. As money managers allocate that capital, it can create volatility in either stocks or bonds depending on investor preferences. Finally, it’s the month for peak election uncertainty every 4 years.
This particular October, there are extra layers of uncertainty due to covid, the changing landscape of the presidential debate, the still-fresh memory of 2016 reminding investors not to trust the polls, record corporate debt issuance, record Treasury issuance (and rising), record MBS and mortgage rate spreads, record mortgage origination volume relative to the industry’s capacity, hot and heavy fiscal stimulus drama, and probably 17 other things I’m neglecting to mention.
If we had to pick one flashpoint from the list above that’s most likely to have the biggest impact on the bond market in the short term, it would probably be the timing and size of the fiscal stimulus package that will undoubtedly arrive in one form or another by and by. It was the primary motivation for the big jump at the beginning of the week and indecision surround stimulus was behind several of the bigger moves that kept bonds in this narrow range during the week.
In the slightly bigger picture, remaining under 0.79 keeps 10yr yields under the last major ceiling from late August.
The current visit to these levels is definitely more threatening though. A break above 0.79 would carry additional momentum implications and force a conversation about the previous major high at 0.95–a level that’s really not that hard to imagine based on the Q4 trends kicked off by October in at least 7 of the last 11 years. 0.95 is far from a foregone conclusion though. It really depends on how things go down in the coming days/weeks. For instance, the harder it is for congress to furnish a decent stimulus bill, the better it would be for bonds. Indeed that is the buzz that’s helping the bond market hold its ground so far today. The biggest risk this afternoon would be upbeat stimulus headlines that convey prospects for the passing of a pre-election package.