What Does the US Bond Market Signal Now? 2 year vs. 30 year
What Does the US Bond Market Signal Now? 2 year vs. 30 year
As the US Fed chair spoke yesterday, the US 2-year bonds fell off a cliff, but how many people reported that the 10/30-year bonds did not follow? In other words, the panic was only at the short end of the curve. The next question is, what does this mean? It means that the panic in the bond market is not widespread. Or it means that money is already moving into long bonds as the risk-off trade into a recession gets priced in. The contra to that is that money managers find the long bonds at these yields attractive as a risk-free rate given the alternatives. So there is an asset allocation trade. There could be many reasons. The recession is not tomorrow morning but months away, and who knows, maybe. But the markets are here and today. Intermarket divergences are also an advanced warning of a possible trend change. The 2-year bonds are in wave 5 of the decline since 2020, which looks like the last leg down. The non-confirmation from other duration bonds signals that the bond bear market or this leg of the bond bear market [2020-2023] is coming to a close. A big reversal that can last for 12 months may show up before another bond bear can rear its head. Bonds are slow-moving and take time to complete moves, so 12 months is the normal time frame for them. Be prepared for a bond market rally is the takeaway from the chart below.
20230308
