Low volatility is a thing of the past

This month, markets became nervous that inflation was finally making a comeback. It began with the monthly non-farm payrolls (NFP) report, where average hourly earnings were much stronger than expected, sparking inflation concerns. That catalysed the sell-off in equities, and a jump in volatility. Ostwald said the sharp gyrations taught us that low volatility is probably a thing of the past. Worries about price levels intensified after US consumer prices rose by more than analysts’ estimates in January. That sent the yield on the ten-year US Treasury to the highest level in four years, above 2.9%. Ostwald says that while he does not expect to see a massive boost to inflation, the market is reassessing its inflation expectations. He says the US Treasury ten-year yield could get up to 3% very soon but it will be ‘a real push’ to get the yield up to 4%.

Ostwald says we have come to the end of the 30-year bull market for bonds but equally he says, that does not necessarily mean a massive melt-up for bond yields. He says there are other forces at work, such as demographics. His logic goes, as people save more there is a greater desperation for opportunities, and as yields move higher investors will buy the dips in bonds, sending bond prices up and yields down again.

In terms of the rotation trade, Ostwald says that if two-year yields rise to 2.5%, we could see some flows steer away from equities into bonds. On the ten-year yield, 3.3%-3.5% is the range which starts to potentially put downward pressure on the equity market.