Bond selloff eases but risk gauges flash orange

LONDON (Mar 2) - The recent violent selloff in the $20 trillion U.S. government bond market has eased, but it isn’t over.

Signs of stress are in fact everywhere; they imply that more such episodes of turmoil -- or “tantrums” as they have become known -- lie in wait over coming months.

Ten-year Treasury yields, the main reference rate for global borrowing costs, are now around 1.4%, having spiked last week to 1.6%, a whopping 130 basis point rise from March 2020 lows.

The brutal spillover into stock markets shaved $2 trillion last week from the value of global equities, which are trading on exalted valuations following a decade-long rally.

Volatility could return if U.S. economy continues to surpass expectations and President Joe Biden’s $1.9 trillion spending plan says Salman Ahmed, global head of macro at Fidelity International, noting “risks emanating from the impending fiscal dominance that will drive a notch-up in cyclical inflation”.

Here are some indicators that show bond market stress is by no means over:

1/ VIX TO FOLLOW THE MOVE?

The global bond slump boosted the volatility index to near April 2020 highs, but it contrasts with a similar index in the equity market which is trading half of the levels seen in April.

Signalling more stress for the bond markets is the widening bid-ask spread in U.S. Treasuries, an indicator of shrinking liquidity in the deepest bond market in the world.

Data from Tradeweb, a trading platform, showed wider spreads were a feature across the yield curve, pushing them to their highest levels since the March 2020 pandemic-fuelled selloff.

Reuters