BondWorld : Move Index. Bond volatility threatens to spill over into equities
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Andrea De Gaetano – Independent Analyst
BondWorld – All rights reserved
The ECB kept rates and its buying programme unchanged on 28 October 2021, but failed to quell bond turbulence.
Despite Christine Lagarde’s accommodative tone, the sell-off on government bonds intensified, especially on peripheral bonds.
The yield on BTPs rose to over 1.2% on the 10-year maturity, from 0.90% before the ECB conference.
The market is anticipating rate hikes from central banks in the face of galloping inflation. Eurostat estimates inflation at 4.1% year-on-year in October 2021 (2.1% excluding food and energy).
In the US, inflation stood at 5.4% in September.
The rise in yields on two-year government bonds was particularly marked in Canada, after the Central Bank of Canada announced the end of quantitative easing on 27 October.
The Canadian central bank kept interest rates unchanged at 0.25% and will maintain its holdings, renewing them as they mature, but will not increase them. GDP growth at 5% per annum and inflation at 4.4%.
The tension in government bonds is confirmed by the MOVE Index which measures volatility on US Treasury options. Despite the quiet calm seen in equities, with the VIX falling to 15 last week, the MOVE Index rose from 50 in September to 78 today, its highest level for a year.
Long-dated government bonds, which rose in price with a consequent fall in yields, are pricing in a slowdown in economic growth, which was already evident in US GDP in Q3, at a pace of 2%, down sharply from 6.7% in the previous quarter.
An earthquake on 2-3 year government bonds was seen in recent hours after the Australian central bank announced it was abandoning its 10 basis point target on the 2024 Australian government bond. Yields immediately soared.
OPERATIONALLY AND FINALLY
With inflation on the rise and rates still close to zero, the scenario remains more favourable for equities than for bonds.
However, the turbulence in bonds at new highs in equities suggests that new gradual profit-taking/hedging in equities is desirable to consolidate performance.
Bonds are usually ahead of equities and are pointing us towards higher interest rates and slower growth on the horizon. A combination that has never been a favourite.
After tomorrow’s Fed announcement, US employment data on Friday the 5th will give new indications to adjust.
Source: Eurostat.
Quelle: BondWorld.ch
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