Citi says rate volatility without Fed repricing is concerning

Investing.com -- Citi warned on Friday that bond market volatility has entered a more dangerous phase for risky assets, with the latest selloff driven by the long end of the curve rather than Fed expectations.

“We have long argued that many risky assets are driven less by the level of rates than by the volatility of a rates sell-off, i.e. by the MOVE index,” wrote the bank.

That index broke above two standard deviations on a one-year lookback last Thursday, a day after strong PMI data and a weak auction pushed the 10-year Treasury yield above 5%.

"This implies that we have entered a more dangerous phase of the rates sell-off," Citi added, noting that high MOVE readings have historically coincided with weakness in the S&P 500.

The bank offered some reassurance, saying the MOVE index has historically fallen back below that threshold within days, and typically calms once investors work out the Fed's hiking cadence, usually about two months after the first hike.

However, Citi said that comfort relies on monetary policy being the driver. The recent move was led by the back end of the curve, with its rates strategists pointing to a buyer's strike that has made auction weeks notably worse than normal.

Citi's best guess is that the neutral rate is moving higher alongside a strong growth outlook. It said there is no clear catalyst to break the buyer's strike in the short term, suggesting MOVE could stay elevated.

Beneath a steady S&P 500, the bank noted small caps have sold off more sharply.

Original Article

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