Inside Markets — Bond Yields

Steep curve inversion and tepid US growth data from Q4’22-Q1’23 generated consensus for an imminent recession and led to a crowded long position in Treasuries.  However, improved US growth data beginning in late May resulted in rising yields with CTAs and other systematic strategies shorting Treasuries in June as the market moved through moving averages and other simple triggers. A crowded long position, CTA selling and bank portfolio duration selling from March have exacerbated the backup in yields as the 10-year approaches the cycle peak near 4.20%.

The recent steepening of the 5/10 yield curve is also approaching a technical challenge at -9.5bp. The 10-year yield test of cycle highs and technical set up for the 5/10 curve make current levels a defendable place to add bond duration. This would also be a decent place to add duration if the recent steepening in the 5/10 curve implies a near-term end to the Fed’s hiking cycle.

The S&P 500 (SPX) keeps its bullish trend at levels north of 4325, which is -4.3% below current levels. Implied volatility also needs to stay contained with VIX levels above the 20-22 range serving as an early warning signal. The VIX spiked yesterday but remains below 16.  Implied equity volatility often follows implied bond market volatility measured by the MOVE Index, which remains contained at 115 despite the rise in yields. Levels north of ~145 seem to line up with a spike in equity volatility on a 1-2 day lag. For now, it’s best to assume the pullback is healthy consolidation from a strong May-July rally.