Bond bust: Black swan or ordinary duck?
Asia Unhedged asserts that the Great Bond Bust that followed the Great Bond Rally has probably expended itself, though position-squaring by leveraged players may keep fixed-income markets in a tumult for a while. Bloomberg News, in a market-based ornithological exercise, wonders aloud if the “great bond selloff” was a Black Swan event.
A black swan is a market occurrence that deviates beyond what is normally expected of a situation and is extremely hard to predict.
By this definition what happened recently in the global bond markets is not a black swan. Nor is it a swan of any kind. It’s more like a duck, as in that old barnyard adage: if it walks like a duck, flies like a duck and quacks like a duck, it’s a duck. Bonds are just trading in line with the same factors they’ve always traded with.
One of the least believable arguments for the “Black Swan” is that selling out of Europe sparked a worldwide problem. As an accomplished bird watcher, Asia Unhedged knows that this isn’t true, not, at least, according to any of the standard statistical measures. Take a gander at the intraday graph below of U.S. vs. German 10-year yields and notice which leads and which lags. The analysis shows that the truth is precisely the opposite of what the conventional wisdom asserts: the Bund market led the Treasury market.
There’s other technical data to support our contention. But the skinny is that the usual predictors — the expected fed funds rate a year ago, the price of oil, and the dollar — explain virtually all the movement in the U.S. 10-year yield between early September (when oil began to crash) and the present. U.S. bond yields set the tone for the world bond market. The round trip in bond yields was mainly a response to the ebb and flow of the deflation threat represented by falling oil prices and a rising dollar.