Rates Spark: Range Trading Within a Declining Channel

 | Apr 18, 2023 17:56

Markets are still waiting for the data smoking gun that proves that a recession is coming and that inflation is a problem of the past. Until then, rates should continue to rise toward the top of their range, but we doubt they will match their early-March highs.h2 Room for one more technical 'head fake' into the May Fed meeting/h2

The growing confidence that contagion risk among US regional banks is now manageable, combined with the (probably misplaced) hope that recent stress will have limited real economic impact, are a toxic cocktail for core bonds. This is the last week before the Fed’s pre-meeting quiet period and recent comments have done nothing to contradict the market’s growing conviction (over 90%) that at least one more 25bp hike will be delivered.

We do not change our view that rates are on a downward path but we also reiterate that this adjustment will not be on a straight line. Realized and implied volatility remain elevated, and the coming weeks and months will feel a lot like range-trading, but within a declining channel. At least until data takes a more decisive turn for the worse. This is the last week before the Fed’s pre-meeting quiet period

If front-end bonds are the worse affected, the sell-off in longer-dated treasuries has also been significant. Both 2Y and 10Y yields are standing at or above their post-Silicon Valley Bank (SVB) failure highs. These levels should, in theory, act as a psychological barrier to further rises unless investors are happy to move on from the US regional banking crisis without materially changing their economic expectations. To us, this is a stretch. Access to credit was already showing signs of tightening even prior to SVB’s failure.

h2 US yields are at their highest levels since early March/h2