Quick post – been in Wellington for a couple of days, but back on deck now (before flying off to Singapore next week!). Anyway, here’s a chart I featured in a recent report on global bonds. It’s also one of the resident charts in the global-scan page of my weekly market chart pack….
TO THE POINT: global sovereign bond market breadth is looking sick.
Why does this matter? (and what does it even mean??)
Firstly, definitions. the red line is the 200 day moving average breadth of global sovereign bond yields (developed markets). i.e. what proportion of global government bond yields are trading below their 200 day moving average (I say below to make it consistent with the stockmarket version of this indicator… i.e. 100% reading for this indicator is a sign of strength across global bond markets.
So what does it mean? Basically we are seeing less and less 10 year government bond yields trading below their 200 day moving averages. In my view this represents a progression towards a trend change in government bond yields – the writing is on the wall.
The market where this is most evident is the US 10 year government bond yield (but we’re seeing clear signs of a potential longer term trend change across other countries too).
Speaking of US treasuries, in the context of today’s discussion, the chart below is really interesting. Basically you have the US 10 year government bond yield looking set to break higher, but at the same time bond market volatility is tracking around record lows.
It’s a cliché, but the old markets rule of thumb is that low volatility is a good predictor of future higher volatility. And in fairness we’ve often seen a particular crunch in volatility around turning points in the bond market. So, are we about to see a disorderly selloff in treasuries?
It’s a big call to make, and many have lost their shirts predicting a repeat of the 1994 bond market crash. I’m not a fan of making wild predictions, but what I can say – when I look at the data, and see still very low real yields by historical standards, and very high duration by historical standards… I see a situation of low expected returns and higher risk.