Is There A Storm Brewing In The Bond Market?

1.) YIELDS – Long-term interest rates are back to where they were just before the peak in 2007...before the Great Financial Crisis. Am I suggesting another one of "those" is coming?! No, but the yield on the 30-year Treasury bond is now just slightly above 5% and knocking on the door of fresh 18-year highs. Due to the rise in yields, bonds are stuck in a very long drawdown. While everybody debates what the Fed might do next, the bond market seems to have already made up its mind. So is a bond storm coming? If rates and bond volatility don’t settle down soon… maybe. Remember, interest rates stopped falling the moment the Fed started cutting! That suggested a policy mistake was likely being made. In September 2024, the Fed began its latest rate-cutting cycle. From that point forward, rates across the curve turned higher. That’s the bond market telling you it sees something very different than policymakers. Historically, this type of disagreement is won by the bond market, not the Fed. The funny thing about the bond market is its innate boredom. Nothing happens… nothing happens… nothing happens… then everything happens at once. We use bond volatility (MOVE Index) for clues, and it has been compressing since its spike on March 27. The MOVE Index closed at 77.86, up from the lows near 65. That’s fine for now, and I do expect bond volatility to fail near 85. But this type of compression tends to mean revert too… compression leads to expansion. Often, when expansion shows up in bond volatility, it doesn’t stay there. It tends to spread to stocks, commodities, and currencies. The bond market is a master switch. Right now, equities are benefiting from a bond market that’s elevated but still behaving, with volatility still contained. If this breaks, it won’t likely be subtle. There will be a lot of confusion – huge winners and losers. The thing to watch now is if bond vol breaks out.

2.) OIL – Yesterday was another lower high for West Texas Intermediate crude. This suggests that it, so far, is still following the 2008, 2022 map of spike/fall. WTI closed at $106.90 yesterday after closing at $110.99 on April 29, a lower high from the April 6 close of $113.32. Will supply shortages affect demand enough to see the price of oil deteriorate? I don’t know. Crude oil futures are telling a slightly different story by NOT signaling those lower highs. Bottom line…the oil market is a mess right now. I don’t expect it to get cleaner until this Iran issue is resolved. Let’s hope we’ve not engaged in yet another ridiculous “forever war”.

3.) VOLATILITY – Since the Iran War started, the market has been more volatile on up days than down days. This suggests investors were well hedged coming into March and it's the rally higher that's caught people off guard. Is that hedge still on? Mostly yes, as identified by the Implied Volatility Premium in major index proxies (SPY, QQQ, etc.)