I've seen a lot in almost 30 years of trading debt instruments, and liquidity is at one of the more precarious levels I've seen.
You could almost dismiss the "knock-on" effects of the pandemonium that was the U.K. gilt market. Between the massive selloff and various Bank of England actions, it was ugly, but you could argue that it was isolated (though there is an increasing amount of fear that what is going on in England could spread to other developed world bond markets).
Other countries being forced to sell treasuries to defend their own currency (Japan high on the list of countries alleged to be doing that) adds more pressure. But again, that is within the "normal" bounds.
Last week, we had weak auction after weak auction. Wall Street often does a "good" job of pushing yields a bit higher ahead of auctions, and then rallying after. The "bit" higher was more than a "bit" this time. That is problematic.
Finally, on Friday, and this gets a bit wonky, but we had "index extension." Much of the bond market is tied to various bond indexes which include new issues during that month. Those indexers then have to buy those new bonds, which creates a buyer of duration. For historical reasons (linked to futures, I believe) the official close of the bond market is 3 p.m. ET for those purposes for many participants. As we neared 3 p.m., the bond market gains on Friday dissipated and then went "poof" into the close. That dragged equities down with them.
The MOVE index, a metric somewhat equivalent to VIX in that it measures bond market implied option volatility, remains elevated.
We Need the Bond Market to Normalize!
By "we" I mean bond investors, equity investors, corporations, the economy. Basically it is in the best interests of everyone to see bond markets normalize.
Quantitative Tightening is NOT helping.
I have argued, and will continue to argue that QE and QT behave nothing like rate hikes and cuts. It more directly impacts asset prices as it adds or removes assets from the investible world.
I think that is true and is further complicating bond market liquidity.
My Biggest Fear and Hope
My biggest fear is that the gut wrenching, illiquid trading in bonds gets worse and exposes cracks in the entire market structure. There is concern that is happening and that concern is increasingly well founded.
My biggest "hope" for the market is that positioning has become so bearish, it won't take much to get a tradeable bounce (put buying is excessive, RSIs on large indexes are oversold, AAII and CNN Fear & Greed are good contrarian signals, etc.).
Finally, the economic data is rolling over! I am in the camp that we see a deeper recession sooner than consensus (I see consensus drifting my way and I view consensus as mild Q1 2023 recession). Autos, housing, consumer goods, all seem to be fighting rates and some have inventory issues that have yet to be dealt with.
My view is that in the next week or so we get enough weak economic data to take some pressure off the Fed. That would be "good" until the realization that it is really bad, kicks in.
My expectation is the final lows of this bear market occur with a big risk-off trade (bonds do extremely well, while stocks get hit hard). I think we have another everything rally before then.
We do get a lot of info on the jobs market this week. It seems one area that investors, politicians and the Fed seem to believe is strong. Last week's unemployment claims supported that view, but I'm not convinced.
Be safe, be careful. This is risky.
I like using options and trading small as the moves are so large and disproportionate to the information driving the moves, that caution is the order of the day -- regardless of how you are trading this market, or positioning yourself.
