Wednesday's Market Minute: It's Beginning To Look a Lot Like 2011, 2013, 2014, 2017, 2021…

The bad news is, our politicians are too inept to decide quickly to extend the debt ceiling. The good news is, it’s a much more familiar problem than what investors have had to contend with the past three years: pandemic, generation-high inflation, protestors storming Congress, etc.

Perhaps that’s why VIX has been languishing around 17.5, a notably subdued level compared to COVID chaos and post-pandemic inflation. In 2011, VIX touched 48 as the S&P tumbled almost 20%, and bonds surged, sending the 10-year yield down in a hurry from 3.5% to 2%. Maybe that’s because in that instance we pushed it just two days before the deadline?

This is, of course, happening at the same time as regional bank turmoil. The sector took another monster 20% dive in the past week, and bonds barely budged. Compare that to the initial reaction by bonds back in March, when the 10-year dove from above 4% to below 3.3%.

The stickiness of Treasury yields despite a fresh crash in regional banks and an escalating debt-ceiling debacle is probably a sign that investors have, once again, overestimated the imminence of a deeper downturn in the economy. Taken in the context of the inflationary backdrop, it also means the risk to Treasury yields is starting to look up again.

Recent data support that view. Wages, unit labor costs, and ISM prices paid were all above expectations this month. And despite the conviction everyone seems to share that there will be extreme tightening of financial conditions due to the regional bank situation, the data just don’t show it: credit spreads are little changed, stocks are firm, and economic data is mostly surprising to the upside.

If CPI doesn't surprise to the downside on Wednesday, bond bears look ready to reawaken from their slumber.

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