Is the market bottom visible after the historic bond bloodbath?

  • iShares US Aggregate Bond ETF posted its worst daily decline since COVID;
  • Broad fixed income securities are down nearly 30%, after inflation, from their August 2020 peak;
  • Investors wonder how much pain, sweat and tears the stock market will bring; the “smart money” bond market can provide guidance.

No matter where we look, we will see severely beaten markets. Stocks, bonds, cryptocurrencies and even many commodities have come under heavy selling pressure in recent days.

It is a continuation of broader trends that we have observed since the start of the year. Sharp moves make traders wonder where the bottom will be. Of course, no one knows. But I think we can look for clues in the bond market.

Guilty of the crime: ICC

It all started with the US CPI report released last Friday morning. In fact, volatility started to pick up on Thursday, but bonds took a hit after the inflation data came in worse than expected.

To make matters worse, the University of Michigan Consumer Sentiment Index, closely tracked by the Fed, showed higher-than-expected inflation expectations. All eyes are now on the FOMC meeting as many market participants believe it will result in a 75 basis point rate hike.

“Real pain

The iShares Core US Aggregate Bond ETF (NYSE:) is now down 17% from the August 2020 high. Following inflation (including dividends), the broader domestic bond market has fallen by about 30%.

Bond investors today have yet to experience such a long-term bear market crash as they do today. While the stock market is not showing any signs of panic yet, I would say that recent bond price action suggests that we are simply in “panic mode”.

blow after blow

Note that the AGG continued to fall in two days (Friday and Monday) and more than at any other time without the liquidity crises seen during the GFC crash and COVID. This case is different because it occurs after an extended downtrend.

A surrender-like move is low level. Of course, anything can happen, and who knows where we will be in a few months. But last Friday, the rules of the game changed significantly. The wild and uncoordinated action in fixed income trading on Monday afternoon was disturbingly similar to a flash-crash.

Chart: The US bond market plunges 2.4% in two days. Capitulation?


Junk bond market assessment

However, business loans still carry a lot of risk. Junk bond spreads remain low by historical standards. Imagine the bloodbath that could ensue if spreads approached 2008 or 2020 levels. Something like iShares iBoxx High Yield Bond ETF (NYSE:) would be wiped out.

However, I don’t think that will happen. This decline in loans is above all the story of interest rates. The default levels remain very low. I’m sure there will be an increase, but it took a lot more effort to see a huge wave of bankruptcies that would lead to an explosion in spreads.


We’ll see if the bond market has bottomed out when the Wall Street Journal reports from the Fed of a possible 75 basis point hike at the meeting turn out to be true. The price action last week and earlier this week, at least, brings us closer to the bottom of the bond market.

But who knows, maybe we’ve already touched on it.

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