Ok look, it’s anyone’s guess where yields are going to be in 12 months.
Rates strategists are tying themselves in knots trying to process all of the incoming information. The list of variables in the reaction function seems to be growing by the day. There’s Fed hikes (how many?), Trump (fiscal policy? deregulation?), China (devaluation? frozen money markets?), EM (USD debt load?), Europe (where the hell is the inflation? taper?), Japan (yield curve control? helicopter money?), and on, and on.
But what I’m most interested in given my infatuation with tail events, is the distinct possibility that at some point, circumstances will conspire to trigger a VaR shock in the US similar to that which occurred in Japan in 2003, the taper tantrum in 2013, and the bund shock of 2015. In this scenario, a sharp spike above 3% in 10s triggers panic selling and the only question becomes whether and to what extent the selloff is transmitted to bunds and JGBs. Well, that would be the question for rates. The critical question for equities would be: does the stock/bond return correlation turn positive?
And so, with that as the backdrop, here’s a great chart from BofAML which documents the history of major Treasury drawdowns: