August 20, 2023

Volatility Reports 8/21/23 Credit Markets

Government Bonds and Interest Rates: The bulls see the bears as haters and the worst segment of bond investors.

I am a snob when it comes to price-based analysis. A few smiley faces with pointed arrows do not even come near what should be floated even if it is in the public domain. Add to that the flip use of contrarian thinking as if it worked in a vacuum.  When it comes to extremes in bullish or bearish sentiment the source is only one criterion, among others. But the key is to understand that these extremes can persist for prolonged periods. A casual scan of the chart shown here provides basis for the prolonged period extreme bearish sentiment sustains before being stood on its head for a bullish interpretation. Moreover, the lookback period is a short ten-year history.

Precisely they could remain for 12 months or longer, and the inference is based on not having such a board and deep pessimism about bonds in that 10-year history to make such an inference. Plus, CT’s study of implied volatility for the 20-year bond is sitting just off its low of eighteen where it spiked to twenty-eight in March of this year. So even after the actual credit downgrade, the market does not perceive any additional risk. A bearish event.

This work by Jack Cahn is licensed under a Creative Commons Attribution-NonCommercial 4.0 International