Taper talk may not yet be truly underway amongst Federal Reserve officials, but that is not keeping financial media from getting excited. The chart below shows the percentage of articles concerning each central bank discussing ‘taper’ on a rolling one-month basis. Greater than one out of every ten articles written about the Bank of Canada, ECB, and Federal Reserve mentions potential for reduced asset purchases.
BUT! Investors show little to no concern about reduced stimulus with volatility plummeting across all assets sans crypto and meme stocks. We should not be surprised the daily swings in Bitcoin and trading halts of AMC have been commanding so much attention, very little is happening elsewhere.
Sovereign 10-year yields were the first to enter a trading range after rate hike expectations stalled in late February 2021. Expectations for higher US Treasury 10-year yields measured via financial and major television news peaked on March 22, 2021. Similar peaks in bearish sentiment for US Treasuries occurred in July 2013, February 2018, and November 2018.
Bond investors are seemingly waiting for central banks to finally give in to tapering and/or economic data to roll-over. This waiting game has spread to any and all sovereign 10-year yields. The chart below shows the average developed (left axis) and emerging market (right axis) sovereign 10-year yield weighted by GDP. They have all been on a road to nowhere.
The rolling three-month trading range for the global average sovereign 10-year yield has plummeted to the tightest in history at 10.5 basis points. Talk about boredom among fixed-income markets! Sadly, the same phenomenon has begun to take hold across risk assets from equities to high yield corporates.
Financial conditions indices report the easiest levels on record. For example, the Bloomberg Financial Conditions Index Plus, which includes tech shares, the housing market, and yields, has broken free to unimaginably loose levels.
Economic data surprises are again on the rebound ahead of the May payrolls report. Could a reignited rebound in job gains finally cause some volatility and rise in yields? We are increasingly seeing an opportunity to get long sovereign bond volatility the longer this stalemate goes on.