It's been a while since we took a look at the bond market in isolation. While five charts on a Monday morning won't cover the entire fixed income landscape, we believe there's an interesting message in these high-level takeaways. The biggest takeaway is that risk appetite may be returning to the bond market.
The Bond Market Broadly
After a relentless two-year downtrend, the iShares Core U.S. Aggregate Bond ETF (AGG) is in the process of building a base above the 50 and 200-day moving averages (blue and gold respectively).
Simultaneously, the Potomac Momentum Model for AGG has been positive since November 2023. A move above the $100 level would likely signal that the reversal process has been completed.
Volatility
For those following our work, we've been closely watching the volatility in the fixed income market. The ICE BofA MOVE Index has been making progress to the downside after persistently elevated levels.
For those unfamiliar, the MOVE Index can be thought of as the VIX for bonds. Lower volatility in the space, could be a bullish tailwind for bond prices.
Risk-On?
As bonds catch a bid broadly and volatility subsides, there's a slight risk-on tone in fixed-income land. The weekly candles for the iShares HY Corporate Bond Fund (HYG) are above the 40-week moving average, which is rising, and have taken out resistance in the $75-$76 zone.
The door is now open for a test of the highs.
At the same time, the “safer” iShares 7-10 Year Treasury Bond ETF (IEF) remains in a downtrend. The 40-week moving average is nearing levels last seen before the 2019-2020 bull run.
Why?
For those who would like to have a narrative about “why” all the above is playing out, we offer up the lack of meaningful stress in the worst depths of the credit market.
The CCC or Below credit spreads are contracting below the one-year moving average. But you know what we think of narratives.
*All Charts from Optuma as of the close of trading on January 26, 2024
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