Bond market action

Although the headlines are directed at the equity markets, due to the increased volatility and wealth erosion, the real action seems to be in fixed income. In terms of credit, spreads have moved up, but not meaningfully. They still show a healthy market with enough liquidity (at least for now). In the Treasury yield market, an incredible battle is being fought: in the chart below, you can see the cash market (green) vs the futures market (red). Right after the announcement of retaliatory tariffs by China, the cash market yield of the 10 year treasury rose, probably (not able to fact check) due to China dumping bonds in its portfolio. On the other side, investors concerned about rising recession probabilities, decided to buy long end bonds futures, creating the dichotomy we see in the chart. If it weren’t for China, perhaps we could have seen 3%ish handle. However, we closed yesterday at 4.18%. Because of this tug-of-war, we may have lost a recession indicator. Let’s see who has a stronger motive.

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