This note examines recent extreme bond moves, trying to assess whether it is something new or just a correction offering an opportunity to enter at more favourable levels. In summary:
The Gilt 5yr 24bp yield increase was an extremely rare event.
However, >15bp (+/-) changes have become a more frequent occurrence.
Globally, December inflation data did not suggest a change to the disinflationary trends in place.
Economic surprise indices across many countries are unusually all close to 0
The breakdown in fixed income market structure witnessed in Oct23 has not repeated itself in the current yield correction, but there is a risk it does if yields increase further or range trade
In such a scenario, the correlations between fixed income/equity/credit/USD seen in Nov-Dec23 would reverse (as they have this week)
Commodities continue to trade weak, despite the growing issues in the Middle East
This suggests that there has been only a Central Bank market correction. The risk, though, is that if Central Bankers continue to push back and keep rates on hold too long, thereby reducing the demand for bonds, that fixed income internals deteriorate and cause a revaluation of risk assets.