According to Danske then, those sell-offs usually last around two months and the average increase in 10-year Treasury yields is around 120 basis points. They also add that bond yields tend to decline by 20-30bps in the months after a sell-off ends.
They also tend to coincide with changes in monetary policy, as this table shows:
But there’s quite a bit of variation in terms of post-sell-off moves:
a) In the instances where the Fed switches from being on hold to enter tightening mode, the performance is rather mixed. Post the sell-offs in 1994 and 1999, yields are roughly flat or slightly higher. However, after the sell-off during spring 2004, a strong bullish trend resumed, marking the beginning of the period of “the bond yield conundrum”.
b) In the cases where the Fed switches from being in easing mode to go on hold, there is a evidence that the sell-off reverses and bullish sentiment resumes shortly after the sell-off ends.
c) Where the Fed introduced additional monetary easing via the QE1 scheme on 18 March 2009, yields were pushed sharply higher, after an initial drop on 50bp on the day of the announcement. After the sell-off ended, the bond markets reversed the bearish trend and ten-tear yields were pushed 65bp lower in just one month.
So where are we now? The Fed introduced QE2 five weeks ago and since then the market has pushed up ten-year bond yields by 100bp, in a reaction that resembles the one that occurred after the announcement of QE1.Up, down, movin’ all around.
Over the past two decades, there is only one case of a bearish sell-off that led to a prolonged bearish trend in long bond yields. This occurred in 1994, when the Fed initiated a long period of monetary tightening. We are hardly in this scenario right now, and we expect the Fed to deliver a first hike in mid-2012.
Based on this case study, we see a good case for some short-term reversal of the selloff.
The only thing that seems certain right now is volatility.
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