Yesterday, the bond market experienced a significant surge in volatility, as indicated by the MOVE index, which measures bond market implied volatility. The index soared from 110 to 134, highlighting the increased uncertainty and fluctuation in bond prices.
Traditionally, equities and bond yields tend to move in tandem, as investors often turn to bonds as a safe haven asset during periods of market turbulence.
However, when bond yields rise sharply, it can create spikes in treasury volatility, which can cause uneasiness in the equity market.
To provide a visual representation of this relationship, we have included a chart below that compares the inverted MOVE index with the performance of the S&P500.
The chart reveals that, despite the bond market volatility, equities managed to hold up remarkably well yesterday.
Nonetheless, it is important to note that the significant gap between the MOVE index and the S&P500 also indicates the presence of potential downside risks.
Yesterday, the bond market experienced a notable surge in volatility, triggered by the movement in US yields. Both the short-term and long-term ends of the yield curve rallied towards cycle highs, driven by the release of unexpectedly positive US labor data.
This surprising turn of events led to heightened fluctuations in bond prices, catching the attention of investors worldwide. However, amidst this market turbulence, one player seemed to march to its own beat—the US dollar (USD).
Despite the solid ADP employment report and mostly positive ISM Services PMI data, the USD shrugged off the positive news and traded lower.
It approached the crucial support level of 103, defying market expectations. The FX leader board today heading into NFP showed JPY was the leader of the pack across all fx majors. This is unusual as the divergence of US10Y and JPY continues.
Normally an inverse correlation, but the JPY has held up very well despite the push higher in yields.
The boost this morning has mostly been driven by the higher-than-expected earnings data out of Japan with cash earnings jumping to 2.5% versus forecasts of 0.7%, which did spark some additional speculation that some policy tightening could be on the horizon.
Tip from our analyst: In recent newsletters, I've preferred to navigate away from any upside moves on GBP or EUR as these markets are heavily stretched against he USD. However, the positive data out of the US yesterday saw very limited moves for the USD, which is why I will waiting for the report to come out and close my screens for the week.
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