This is the “to be or not to be” question for the bond market right now. Said differently, have we suffered sufficient slings and arrows for investors to begin to believe that bonds have priced-in what hikes may come? While this inevitable correction is devoutly to be wished, nailing the timing and the duration of what may be a series of multiple corrections and false starts continues to be tantamount to catching the proverbial bare bodkin. Have we seen enough weakness by standards of the past decade? Certainly. By 1999’s standards? Almost. 1994? Not yet. 1981 or 1984? Forget about it.
The chart below attempts to quantify this in purely technical terms by comparing the overall move in yields to various sell-offs of the past. Each box accounts for roughly 2% of upward movement. Notice how none of the examples from the past decade have covered as much ground as the post-covid bounce. Then notice just how much bigger the capacity for selling was in the 90s and especially the 80s. It’s worth keeping in mind that current inflation metrics have much more in common with the 90s compared to the past decade.
From a technical standpoint, the case for a bounce is getting easier to make. The past 3 corrections all began with a quarter or two of milder movement. All three then had at least one quarter of heavy selling, a period of consolidation, and then additional heavy selling. We can also consider that, at 2.3%+, the yield curve is currently fully accounting for 2022’s rate hike outlook (i.e. the blue line below is in the 2.25-2.50% range for Fed Funds Futures).
It will be the evolving landscape of Fed rate hike expectations beyond 2022 that informs the bigger picture bounce potential in the coming weeks/months. That’s easy enough to say, but there’s quite a lot that goes into rate hike expectations beyond simple inflation data. Still, inflation data (and the developments that directly impact it, like oil price surges) and the Fed’s assessment of it are top priorities. With that in mind, next Wednesday’s Fed minutes can probably tell us a lot more than tomorrow’s jobs numbers.
To answer the question posed in the title and bring this all together, yes, the bond market has sold off enough that we could now consider it to be “eligible” for a bounce. In other words, it’s not silly or premature to be pondering such questions, but whether or not that bounce materializes in April depends on data and the Fed’s stance on that data.