Yesterday, in the wake of some intense credit market drama, St. Louis Fed President James Bullard acknowledged the obvious. Quoted in the Wall Street Journal, Bullard showed just how upside down these “markets” have become.

“Inflation expectations are dropping in the U.S., and that is something that a central bank cannot abide,” Mr. Bullard said. Referring to the process of gradually reducing, or tapering, the amount of monthly Fed bond purchases, he said, “we have to make sure that inflation, inflation expectations remain near our target, and for that reason, I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data-dependent, and we could go on pause on the taper at this juncture.”

Indeed, stocks are to celebrate the imminent demise of the recovery narrative precisely because inflation breakevens in TIPS trading suddenly sprung the “wrong” way after a year of hibernation induced by doubts about the last QE? As with all bubbles, logic need not necessarily apply. There is no need to rehash that fourteen month period of utter listlessness in TIPS but to remark about two facets more recently.

First, the five-year breakeven was the indication that suddenly broke upward on Good Friday causing more than a little giddiness about the recovery prospects, only now to have totally reversed (right around July 3, of course) in what can only be described as stunning in the pace of it.

ABOOK Oct 2014 US Credit Breakevens Short

Second, the 5s now sit at a low level not seen since the Flash Crash/ECB OMT days of the middle of 2010. Small wonder that the persistent crowing over recovery success via orthodox “inflation” has totally ceased, to be replaced now with whispers of the central bank equivalent of hell, to paraphrase President Bullard – “deflation.”

The tie to the global dollar short is not coincidence as the scale of leverage and funding availability should be vulnerable to changing economic expectations in addition to finance. To my analysis, the ECB’s June “panic” again provided the first stirrings of doubt and recalibration in the global accumulated balance sheet on offer in dollars. It does not help that there is the added element of doubts in central banks themselves, which only heightens the urgency to dispel it as best as possible through grandiose, but intentionally ambiguous, assurances.

In that respect, breakevens have finally joined the rest of the credit markets globally in turning a bearish view, including the persistent flattening in the US treasury curve going all the way back to whatever happened on November 20, 2013.

ABOOK Oct 2014 US Credit 5s10s

While flattening with the 5s as the pivot has broken out of the recent trend, that is only due to the changing nature of trading in the nominal 5-year itself. Once under the spell of rising interest rates due to “forward guidance” ending ZIRP, recent doubts about “the” economy and the Fed’s ability to actually achieve that have meant that the entire curve is running lower nominally rather than just the long end. Neither of those trends is particularly optimistic about future prospects, so in that respect is doesn’t much matter which is occurring – flattening or widespread bid.

ABOOK Oct 2014 US Credit 30s

While it may come as a shock to James Bullard and those with him in the FOMC, this is just the accumulation of eleven months of significant doubt now expressed more broadly and forcefully. In other words, they ignored the bear flattening as much as they could as long as they had the “cover” of breakevens doing nothing. Now they are being forced to answer for yet again failing to live up to their own slashed expectations, and risk markets are going to be happy they did so? Since that possible reformation of policy intentions has to take into account the role of systemic liquidity, such short-term exuberance in risk may not last all that long. Fundamentals matter in the end, which is why the rush to reassure and fortify expectations.