I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Monday Money, I write about money management.
Let’s take a look at some happenings in the bond market. The MOVE index is way up. What does that mean?
The MOVE index is a measure of expected volatility in U.S. Treasury yields. It uses prices of roughly one-month options for 2-, 5-, 10-, and 30-year Treasuries to gauge bond market uncertainty around expected bond yields.
A higher MOVE index suggests greater uncertainty, not necessarily expectations of higher yields.
Investors are demanding significantly more compensation in real terms for holding duration. That can reflect expectations for higher real policy rates, greater uncertainty around future monetary policy, a higher term premium, or some combination of all three.
The market is increasingly being forced to price two competing possibilities.
Inflation and nominal growth remain strong enough to keep rates higher for longer.
Or restrictive policy and elevated energy costs eventually weaken demand, credit and employment enough to force much easier policy later.
The wider the range between those possible outcomes, the more valuable interest rate protection becomes and the higher MOVE can rise.
Typically, higher bond volatility goes with a lower S&P 500 price. But not right now. The two series have diverged:
Today, U.S. stock market futures are down, gold and silver looking even worse, and crude oil up almost 3.5%. Government bond rates around the world are up — the U.S. ten-year rate is up more than 1% (about 6 bps) and the 30 year up .60% (about 3 bps). This is a bear flattener, with yields rising more for shorter durations than longer.
Some people think we might be reaching a peak on bond yields, and thus that the way the divergence could correct is with the MOVE index (and yields) moving down. Historically, of course, bond yields rising are sometimes followed by more rising and sometimes by falling:
What’s an investor to do? A high MOVE index and weak breadth in U.S. stocks suggests caution!