What comes after a week that shook the world

We’re living through arguably the most truly global attempt to tighten financial conditions in memory. This is shifting the tectonic plates beneath the world economy, and threatens dangerous developments in society and in politics as we all try to adapt. And yet what strikes the eye after a week of market landmarks and aggressive interventions by central banks is the continuing discord. There’s a broad acknowledgement that the future involves tighter conditions to combat inflation, and with it an elevated risk of recession; but even though these sobering things are now widely accepted, deep differences remain. This is an attempt to sum up the most important developments after an epochal week.
The downward trend in 10-year Treasury yields that has persisted ever since the Fed under Paul Volcker slew inflation is over. There have been false alarms before. Dig through the archives and you’ll find I wrote at very great length about what appeared to be the end of the trend during a bond selloff as long ago as 2007. But that market seizure triggered the credit crisis, which would bring Treasury yields to previously unimaginable lows. High inflation in 2022 will make that prohibitively difficult to repeat.
There are many ways to measure a trend, and I want to resist any temptation toward pseudo-scientific technical analysis. But on any sensible approach, the trend has been broken. If Jerome Powell and the Fed succeed as they hope, and replicate Volcker, then maybe they can start another downward wave. But that will be a new trend, not a resumption of this one.
An study shows various trend lines that might link the high points for the 10-year yield since Black Monday in 1987. Any version of the line has been breached. And critically, after a series of lower highs, the cycle has left the yield significantly higher than at the top of the previous cycle. Traders can no longer rely on the post-Volcker momentum behind falling rates, which explains why the Fed feels the need to replicate its illustrious former chairman.
The yield is now well above its 200-day moving average, a measure of the long-term trend. To illustrate that more clearly, this is how the gap between the yield and the moving average has shifted since 1987.
The 10-year yield broke slightly further above the long-term trend in 1994, which not coincidentally was the last time the Fed — under Alan Greenspan — surprised the market with an aggressive series of rate hikes. But it’s still a big deal that the most important measure in finance is the furthest above its trend in 28 years.
For another indicator that the ice has been broken, just look at the losses that the selloff has inflicted. The joys of bond math mean that a rise in yield from a lower level can inflict a greater dent on the price, and that shows up in spades this year. The following chart, from Bespoke Investment Group, shows the biggest calendar-year losses that holders of 10-year bonds have suffered since 1961. With 2022 not quite three-quarters over, this is already the worst year for bond investors in six decades.
For a final critical indicator, read the latest opinions of Albert Edwards. Societe Generale’s chief investment strategist is known as an inveterate perma-bear.
—Bloomberg