Bond Market Overemphasizes the Chance of Deep Recession

    The bond market reacted soundly as banks started to fail. Over three days in March, yields of 2-year Treasury decreased by 1% point, the highest since 1982.

    So the indication was evident to investors and traders who considered these indications positive. The time when inflation was a big concern is now long gone. Rates showed that the stress on the banking system made an economic downturn inevitable.

    Even after three weeks, there are still questions about fixed-income volatility. Despite its severity, it is absent primarily in equities and credit.

    The Factors behind the Sharp Decline

    Explaining the disparity has been a Wall Street obsession because of the impact Treasuries have on models developed to anticipate future inflation and Federal Reserve policy. One concern is if factors unrelated to the economy—precisely, speculators’ gloomy attitude—made the abrupt decrease in yields a false recessional alarm.

    As is standard in markets, the issue is far from settled. The unexpected increase in rates may prove to be what it usually is: a terrible indicator of the status of the economy. Even if there are some quiet areas, the markets are not yet giving the all-clear.

    Their immense value decreases from the prior year. One could interpret the dominance of mega-cap technology shares at the top of the 2023 scoreboard as a sign of impending doom. These and related quirks exist in corporate lending.

    Even said, the market’s differing reactions to the events of March continue to be historically significant. The stock market, which is typically a venue for speculators to move quickly and with a fragile understanding of more significant repercussions, handled the collapse of Silicon Valley Bank and the ensuing fears of contagion very successfully. Blue-chip and high-yield spreads in credit have been smaller than last October.

    Meanwhile, the two-year Treasury yields had their most extensive daily changes in forty years last month. The widest difference between stock and bond volatility in 15 years was produced by the ICE BofA MOVE Index’s jump to its highest level since 2008 midway through March. Even after some cooling off, the gauge is still higher than average compared to the average of the previous ten years.

    Severe Repricing

    Such severe repricing is one of the most significant indicators that a recession is about to begin. According to George Pearkes of Bespoke Investment Group, the meaning could be more precise now.

    The fixed-income group will dismiss any idea that stock jocks had a deeper comprehension of recent events. It has long been regarded as the more shrewdly invested asset class. However, positioning information backs up the view. Equity hedge funds spent the nine weeks before the SVB blow-up cutting bank shares.

    Bloomberg News claims that the early March launch of the $24 trillion Treasury market exposed bond dealers. Models from Citigroup Inc. and data from Commodity Futures Trading Commission revealed that, before Silicon Valley Bank’s abrupt collapse, bets against two-year Treasuries had soared to record heights. It crushed hedge funds and speculators as markets sharply revised Fed forecasts.

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