These two market gauges may signal a big risk-off event for the market, says BofA

By Jamie Chisholm

A jump in bond-market anxiety coupled with a selloff in financial stocks may mean a serious shock to markets, according to Bank of America

A confluence of events for Treasurys and banks may cause a nasty selloff

A jump in bond-market anxiety coupled with a selloff in financial stocks may mean a serious shock to markets, according to Bank of America.

In the Flow Show report published Friday, BofA analysts led by Michael Hartnett noted that the MOVE index, a gauge of expected Treasury market volatility, has jumped 33% in just the last two days.

Like equities peer the VIX VIX, the MOVE tends to spike when there's stress in Treasurys. Yields on 10-year Treasurys BX:TMUBMUSD10Y surged to 19-year highs this week as investors dumped bonds in response to inflation fears and an expected faster pace of Fed interest rate hikes.

Such a quick rise in the volatility of the global-borrowing benchmark is not good for markets, Hartnett said. If this continues and is combined with a sharp fall for the iShares Global Financials exchange-traded fund IXG, it spells great danger.

If global financials (IXG) fall below $125 and the MOVE goes above 125, a "risk-off deleveraging event [is] coming," he said. The IXG is currently 128.90 and the MOVE is 105.6.

And he added: "If U.S.-Iran deal drops oil another $10 but yields keep rising then big risk-off."

However, Hartnett said, a "policymaker panic" will arrive to reduce oil prices and bond yields. (Presumably he thinks any fixed-income-focused policy will be more substantial than the U.S. Treasury's currently unsuccessful plan to suppress benchmark yields by increasing their purchases of longer-maturity government debt.)

If that happens, investors should "nibble on bonds." There would be a 10% gain for the 5-year bond, 14% for the 10-year, and 22% for the 30-year should yields drop 100 basis points in the next 12 months, he added.

To summarize, Hartnett said that "markets stop panicking when policymakers start panicking," and that any intervention to suppress oil prices and yields will also be negative for the U.S. dollar DXY, while positive for commodities and emerging market assets.

-Jamie Chisholm

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