Does The Recent, Historic Bond Bloodbath Signal A Market Bottom?
2022.06.15 11:56
- The iShares U.S. Aggregate Bond ETF suffered its worst back-to-back daily drop since COVID
- Broad fixed income is down close to 30%, after inflation, from its August 2020 high
- Investors are left wondering how much more pain is to come in the stock market, but you might want to watch the “smart money” bond market for clues
No matter where you look, markets have taken a drubbing. Stocks, bonds, crypto, even many commodities have come under intense selling pressure just in the last few days.
That continues the broader trends we’ve seen since the start of the year. The sharp moves leave investors wondering where the bottom will be. Of course, nobody knows. But I think we can look to the bond market for signs.
Scene of the Crime: CPI
It all started with the U.S. CPI report last Friday morning. Actually, volatility began to tick up Thursday, but bonds really got hammered in the wake of a much hotter than expected inflation print.
Compounding matters was a bigger-than-forecast University of Michigan Consumer Sentiment inflation expectations gauge print—a data point the Fed looks at rather closely. All eyes are now on this week’s FOMC meeting for what many market participants believe will be a 75-basis point rate hike.
“Real” Pain
The iShares Core U.S. Aggregate Bond ETF (NYSE:AGG) has now fallen a whopping 17% from its August 2020 peak. After inflation (and including dividends), the broad domestic fixed-income market is down about 30%.
Today’s bond investors have not endured such a protracted “real” bond bear market as this. While the stock market has not yet shown signs of panic, I assert recent price action in bonds suggests we’re in panic mode there now.
Back-to-Back Slams
Consider that AGG fell more in a two-day stretch (Friday and Monday) by more than at any other time, sans the liquidity crises seen during the GFC and COVID-crash. This time is different as it comes after a long-lived downtrend.
The capitulation-like move has the hallmarks of a low. Of course, anything can happen and who knows where we’ll be a few months from now. But the game clearly changed last Friday. Wild and loose ensuing fixed income trading action Monday afternoon was quite “flash-crashy.”
Featured Chart: U.S. Aggregate Bond Market Plummets 2.4% in Two Days. Capitulation?
AGG Daily
Junk Bond Market Assessment
Still, there remains a lot of risk in corporate credit. Junk bond spreads continue to be low by historical standards. Just imagine the bloodbath that would be apparent if spreads neared 2008 or 2020 levels. Something like the iShares iBoxx High Yield Bond ETF (NYSE:HYG) would be obliterated.
I don’t think that will happen. This downturn in credit is primarily an interest rate story. Default levels remain extremely low. I’m sure that will increase, but we’d need many more big shoes to drop to see a massive wave of bankruptcies that would result in a spread blowout.
Bottom Line
We’ll see if the bond market bottomed around when scoop of the Fed potentially raising 75 basis points at the Fed meeting hit the tape. Price-action last week and earlier this week at least gets us closer to a bond market bottom.
And it might already have happened.
