May 16, 2022
Coincidentally, we think that changed last Monday when 10-year breakeven yields moved sharply below support at ~280bps. Nominal bond yields finally began to respond to policy rhetoric since Monday’s break with 10-year Treasury yields now 25bps below the 5/6 peak at 3.13%. Returning cross markets to normal collinearity should begin to ease bond market volatility, which has been a primary driver of equity volatility. The CBOE Volatility Index (VIX) has declined from last Monday’s closing high of 34.75 to 27.80 today. We use VIX levels below 20 to indicate that volatility is no longer acting as a headwind for equities. Ten-year inflation breakeven yields have declined from a cycle peak of 304bps on 4/21 to 270bps today. Expect 10-year breakeven yields to decline to support in the 258-260bps range in the weeks ahead as overcrowding in the TIPS market continues to unwind. In the near-term, use declining inflation expectations, well-anchored nominal yields and a simultaneous rally in equities to define an emerging bullish narrative.