Citi says the bond market has entered a more dangerous phase after the MOVE index broke above two standard deviations last Thursday, with the selloff driven by long-end yields rather than Fed repricing. The bank says that distinction matters because this kind of volatility has historically coincided with weakness in risky assets, and it sees no clear catalyst to calm it soon.
A sharper kind of rates selloff
Wall Street's MOVE index, a gauge of Treasury market volatility, broke above two standard deviations on a one-year lookback last Thursday, a day after strong PMI data and a weak auction pushed the 10-year Treasury yield above 5%. Citi warned on Friday that this move pushes the market into a more dangerous phase for risky assets.
The bank has long argued that many risky assets respond less to the level of rates than to the volatility of a rates selloff, measured through the MOVE index. High MOVE readings have historically coincided with weakness in the S&P 500, Citi said.
Why this episode looks different
Citi offered some reassurance, noting that the MOVE index has historically fallen back below that threshold within days, and typically calms once investors work out the Fed's hiking cadence — usually about two months after the first hike. However, that comfort depends on monetary policy being the driver of the move.
According to Citi: "This implies that we have entered a more dangerous phase of the rates sell-off", because the recent move was led by the back end of the curve instead. The bank's rates strategists pointed to a buyer's strike that has made auction weeks notably worse than normal.
No clear catalyst in sight
Citi's best guess is that the neutral rate is moving higher alongside a strong growth outlook, and it sees no clear catalyst to break the buyer's strike in the short term — meaning the MOVE index could stay elevated. Beneath a steady S&P 500, the bank noted small caps have sold off more sharply.
Source: Investing.com
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