Everyone is talking about the sell-off in bonds these days. Yields on the US 10-year benchmark is up nearly 150bp since April, within touching distance of 5%, and 30-year yields are now just over 5%, up from 3.7% in April. With the two-year yield up just 100bp over the same period, the curve has bear steepened by 50bp, and is now looking to un-invert due principally to a sell-off in long bonds, contrary to widespread expectations of bull-steepening via a rally in the front end. The 2s10s is still inverted by around 17p , but the 2s30s is now—as far as I can see from the close on Friday the 20th of October—just about positive. No wonder that the long bond is on everyone’s mind. Sustained bear-steepening during inversions are rare sights in G7 bond markets, so when they are spotted in the wild, they tend to grab the attention and imagination of investors and analysts. But what does it mean? Put on the spot, I’d say that bond market volatility is underpriced.
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