This Is a Global Equity Maelstrom, Not a Bond Tantrum. For Now

  • Rate volatility shows modest spike based on BofAML MOVE Index
  • Treasury futures 3-month options at September 2017 levels

Credit Markets Provide Comfort for Equity Bulls

Don’t blame bonds for the spike in stock-market fear gauges.

While the latest stock rout followed a surge in U.S. Treasury yields last week, volatility in the rates market remains contained, according to Bank of America Merrill Lynch strategists. The bank’s MOVE Index, a gauge of price swings in the U.S. Treasury market, rose to the highest level since May 2017 -- a muted advance relative to the equity panic. The S&P 500 was hit by the worst one-day decline since 2011 while the Cboe Volatility Index surged to its highest level since August 2015.

With U.S. Treasuries benefiting from haven bids, the modest uptick in interest-rate volatility suggests stretched positioning in stocks spurred the global selloff -- rather than panic over higher U.S. yields, according to the index provider.

“While many suggest this shock was driven by concerns of inflation leading to faster than expected policy normalization (the right thing to be concerned about in our view), rates have been incredibly stable compared to past bond-led shocks such as the taper tantrum,” strategists led by Benjamin Bowler wrote in a note.

On Tuesday, three-month options on 10-year Treasury futures rose the most since November 2012. Even with that advance, the index is back to September 2017 levels, after hitting a record low in December.

Meanwhile, U.S. 10-year breakevens Monday dropped the most since July last year on a closing basis, and are little changed Tuesday, suggesting a fresh repricing of inflation expectations may not be the proximate cause for this week’s rout.

“Key to understanding whether this is a short-term technical equity selloff, which quickly reverses, or the beginning of something bigger, lies in where rates vol goes from here,” Bowler and team wrote.

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