It’s understandable, even natural to focus on the amplitude of this or any BOND ROUT!!! and make comparisons to past reflationary trends on that basis alone. But what about frequency? By that, I don’t mean how frequently reflation shows up, though it has been fairly regularly if only because we never get any of that inflation and recovery predicted during each one.
Hysteria the only mainstream byproduct.
Maybe better characterized as duration (though not wanting to get that confused with the bond factor) or length of time. If we have some idea, like amplitude it might give us a sense if we’re closer to its beginning or end.
How long might we expect reflation to last?
The answer: it depends. Not surprising, it’s important to realize that no two have been the same thus far. Therefore, maybe a better pair of questions would be like this: first, would it be unusual if the current reflationary run was somehow brought to an end in the near future? Meaning, does reflation itself take some minimum amount of time?
Second, at the other end, from past experience can we determine if there some kind of maximum, or ticking clock?
A lot depends upon what market price/indication you choose and other parameters, too (how you date beginning and end, for instance). For our purposes, we’ll stick to the nominal 10-year benchmark US Treasury yield for the sake of simplicity.
The longest frequency iteration, Reflation #3, was also the smallest in amplitude. Only reaching 3.24% at its zenith in November 2018, it had been impressive at least in how long it took to get there. Beginning back in early July 2016, this was more than two years and it fought through several bouts of volatility (each one declared its own BOND ROUT!!!) to eventually wind as far upward as it could reach.
At the other end of the scale, Reflation #1B lasted a matter of mere months; from early October 2010 only to February 2011. This was actually less time than the current trend has been underway, and along almost the entire way QE2 had accompanied it.
In between them, Reflation #1A ended up taking a little less than a year and a half. Dating from mid-December 2008 until April 2010, that’s when Greece showed up in global repo. This one’s peak was also the last time the 10s had reached 4.0%; meaning higher upside amplitude as well as a (relatively) more elongated frequency.
That leaves poor #2, the Reflation confused with a “taper tantrum.” With so much going on during it, so much going wrong (modestly rising dollar, most of all) just like #1B, it was probably never going to get very far anyway. Reaching a high of just above 3.0% at the very end of 2013, the start had been not quite seven months prior early in May.
The frequency of the current reflation trend is approaching that length already.
What ultimately matters – both amplitude as well as frequency – tends to be eurodollar related. However high each one managed to get, the reason it got no higher or farther can be put down to clear interruptions in the monetary system: in April 2010, the aforementioned eurodollar crisis which was mistaken for a “euro” crisis; in February 2011, the second phase of that same wider-than-Europe dislocation; January 2014 imposed Euro$ #3, as shown in CNY among other things; and November/December 2018 blasted out a landmine full of deflationary illiquidity that rudely interrupted Jay Powell’s “hawkishness.”
Thus, it wouldn’t be unusual at all if Reflation #4, the current one, suddenly stops and reverses itself tomorrow – should the eurodollar system maybe turn out that way. If the dollar shows up in the very near future, it wouldn’t be the first time so soon.
On the other hand, if there are no further serious monetary problems (having nothing to do with bank reserves), this could go on for well more than a year, more than several years. And while the latter sounds like a much better proposition, or a different one, in many ways it’s actually worse of the same type.
Reflation #3 may have managed to stay in business for more than two years, but that was more than two years squandered for what was never going to be anything more than reflation. And the longer it went, the more convinced many people (especially Bond Kings) became as to how it must have represented something different (this is right where the low amplitude came into it).
Maybe that’s the ultimate point; frequencies change, amplitudes rise and fall, but they all end up the same way regardless.
In the end, at each’s end, it’s the eurodollar’s world.