"Big Short" investor Michael Burry has pointed out in his now-deleted tweet that rising yields across the curve despite a widespread prediction that deflation could be on the cards is likely a function of quantitative tightening.
What Happened: “If everyone is predicting deflation because of all the obvious signs it is coming, and rates are still rising fast across the curve, what does that mean? Must be QT kicking in. September is the first $90B month,” Burry tweeted.
What It Means: Quantitative tightening, the reverse of quantitative easing, means the practice where a central bank tries to shrink its balance sheet by offloading the bonds or treasuries it is holding. The U.S. Federal Reserve has started shrinking the size of its $9 trillion balance sheet by about $90 billion per month beginning in September.
As the supply of treasuries increases in the open market due to the Fed’s quantitative tightening, the yields tend to take a hit. This could be a reason, as Burry pointed out, why the yields are rising across the curve despite the whole talk about deflation.
On Velocity: Burry also tweeted about rising velocity citing a scenario from 1978-79. “Velocity is nominal GDP/Money Supply (M2 here). QT+ higher rates starting to push M2 down. Yet we are seeing a tick-up in velocity, emerging from narrative obscurity. In 1978-79, rising velocity trumped falling money supply to drive inflation higher and higher. Redux would shock.”
Price Action: Fixed income assets usually tend to underperform during a rising interest rate regime. The Vanguard Total Bond Market Index Fund ETF BND and the iShares Core US Aggregate Bond ETF AGG have lost over 5% in one month.
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