SOS central banks wanted!
Yesterday's volatility in the bond market strengthens our belief that central banks' intervention is needed again to avoid another crisis. In the United States, the move up in yields has just started to tighten economic conditions. This week the correlation between Treasury yields and junk bond performance has turned negative, signalling that the selloff might soon leak to risky assets. In Europe, the periphery might soon face problems refinancing its debt as demand for bonds suddenly drops.
Build me an ark as the tsunami of risk of Tesla-Bitcoin-Ark could come
This was the week when the 'tower of risk' in Tesla-Bitcoin-Ark came under pressure causing cracks in an until now unstoppable momentum trade since early March 2020. What has been a positive self-reinforcing feedback loop could suddenly turn into a tsunami of risk.
Podcast: Treasury yield spike sends correlations towards one
Today we delve into the enormous spike in US treasury yields yesterday, in part triggered by a weak 7-year treasury auction and how the accompanying spike in real yields finally set off an across the board deleveraging wave, dangerously sending correlations across asset markets towards one, with commodities and credit also seeing some contagion yesterday. We look through how quickly the Fed might respond from here to the situation and the ongoing danger of the "ARK-Tesla-Bitcoin" Nexus specifically. Today with Althea Spinozzi on fixed income, Peter Garnry on equities, Ole Hansen on commodities and John J. Hardy hosting and on FX.
Market Quick Take - February 26, 2021
US Treasury yields spiked aggressively higher yesterday in the wake of record weak demand for 7-year treasuries at an auction, wiping out risk sentiment and sending global equities into a new and more profound and global spiral lower. Sentiment was sufficiently shaken this time to also trigger unease and selling in commodities markets, and the US dollar rose steeply across the board. Fed action to ease some of the technical reasons behind the rout likely forthcoming in a matter of days.
It's not reflation; it’s risk-taking. But we are approaching the end of it.
We find that the current rise in US Treasury yields is due to risk-taking other than growing inflation expectations. Junk bonds are the best performing fixed-income securities year to date, meaning that investors are selling lower-yielding bonds and buy into junk in an effort to build a buffer against rising interest rates. However, we believe the tide is turning. From this week, the correlation between junk bonds returns and US Treasury yields has turned negative. Given the recent acceleration in Treasuries selloff, we believe that 10-year yields may soon break 1.5%, aiming for a new strong resistance at 2%. The higher US yields rise, the deeper the selloff in risky assets we expect it to be.