Equities are keeping lower alongside bond yields in European morning trade. S&P 500 futures are down 24 points, or 0.6%, while 10-year Treasury yields are marked down by nearly 7 bps to 3.448% at the moment. So, what is the market really saying?
In my view, this reads something along the lines of what we saw last week here. We have basically undergone the evolution of inflation jitters i.e. markets fearing that central banks are going to stick with higher rates, to heightened recession fears i.e. increasing risks of a more damaging economic slowdown.
That pretty much explains the sort of tug of war in the pricing of Fed funds futures over the past two weeks as seen below:
We're now pulled back to somewhere in the middle of things, with the 13 April pricing at the time reflecting the dovish market expectations after the banking turmoil. And the 19 April pricing at the time reflecting the less dovish take by markets after the UK inflation trigger.
If you look at the 10-year Treasury yields chart, you can also see that yields peaked on 19 April upon meeting its 100-day moving average. The high there clipped 3.63% before the now nearly 20 bps drop in the subsequent days including today.
The case previously was that if yields moved lower i.e. traders are more dovish about the outlook for major central banks, that was good news for risk assets. However, that hasn't been the case in the past few sessions.
It seems to be the case that bad news might just be bad news again, though that particular balance is still being worked out.
That will make for less straightforward trading conditions like what we have seen in the past two weeks.
