When a few mid-sized US banks suddenly went belly-up last month, the bond market made its feelings known — and with gusto. Two-year Treasury yields slid a percentage point over three days, the most since 1982. For traders accustomed to treating such signals as sacrosanct, the message was obvious: The recession many had been (incorrectly) predicting since last summer was really, truly inevitable now.
Or was it? Three weeks later, the wise folk of Wall Street still don’t know what to make of the volatility in fixed-income that — for all its ferociousness — remains largely absent in equities and credit. Explaining the divide has become a bit of an obsession for some, especially since Treasuries hold such sway in those models that supposedly divine the future of Fed policy. The gap in market reactions borders on the historic: Stocks absorbed Silicon Valley Bank’s death and subsequent contagion fears with relative ease. And for credit, blue-chip and high-yield spreads never got wider than levels seen last fall. “Each day that there isn’t a banking crisis is another day indicating that the current pricing doesn’t make sense,” said Bob Elliott, chief investment officer of Unlimited Funds. It seems that, in the aftermath of the March banking debacle, the bond crew may have made the wrong call. ~ Natasha Solo-Lyons and David E. Rovella for Bloomberg, April 10, 2023
