Bond selloff eases but risk gauges flash orange

The recent violent selloff in the $20 trillion U.S. government bond market has eased, but it isn't over. Signs of stress are in fact everywhere; they imply that more such episodes of turmoil -- or "tantrums" as they have become known -- lie in wait over coming months.

Ten-year Treasury yields, the main reference rate for global borrowing costs, are now around 1.4%, having spiked last week to 1.6%, a whopping 130 basis point rise from March 2020 lows. The brutal spillover into stock markets shaved $2 trillion last week from the value of global equities, which are trading on exalted valuations following a decade-long rally.

Volatility could return if U.S. economy continues to surpass expectations and President Joe Biden's $1.9 trillion spending plan says Salman Ahmed, global head of macro at Fidelity International, noting "risks emanating from the impending fiscal dominance that will drive a notch-up in cyclical inflation".

The global bond slump boosted the volatility index to near April 2020 highs, but it contrasts with a similar index in the equity market which is trading half of the levels seen in April.

Signalling more stress for the bond markets is the widening bidask spread in U.S. Treasuries, an indicator of shrinking liquidity in the deepest bond market in the world. Data from Tradeweb, a trading platform, showed wider spreads were a feature across the yield curve, pushing them to their highest levels since the March 2020 pandemic-fuelled selloff. A major reason why spreads widened as volatility jumped has been a marked change in the composition of market participants in the bond market in recent years. Traditional participants like banks have ceded market share to algorithmic trading in major markets with some estimates putting the share of algorithmic trading in U.S. Treasuries at nearly 90% compared to 50% at the start of the decade. And as the computer-share driven trading models have become more widespread, turnover in futures and exchange traded funds have exploded while volume in cash markets have stagnated.

Meanwhile, US stock index futures retreated on Tuesday after Wall Street's strong start to March as investors closely monitored the bond market as well as progress on the next round of fiscal stimulus.

The S&P 500 ended 2.4% higher on Monday, its best day since June as markets cheered approval of a third COVID-19 vaccine in the United States and the U.S. House of Representatives' green light for a $1.9 trillion coronavirus relief package. The U.S. Senate will start debating President Joe Biden's relief bill this week when Democrats aim to pass the legislation through a maneuver known as "reconciliation," which would allow the bill to pass with a simple majority.

At 6:32 a.m. ET, Dow E-minis were down 65 points, or 0.21% and 500 E-minis were down 13 points, or 0.33%. Nasdaq 100 E-minis were down 47.5 points, or 0.36%.The U.S. bond markets have stabilized since a selloff sent the benchmark 10-year Treasury yield to a one-year high last week, sparking fears over high valuations in the stock market and emerging as a competitive alternative to equities.

Later in the week, investors will focus on ISM's service sector survey as well as the monthly U.S. jobs report to ascertain the economic health. Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co, Wells Fargo & Co and Morgan Stanley dipped between 0.3% and 1.1% premarket. Zoom Video Communications Inc jumped about 10% after the company forecast current-quarter revenue above estimates, as it expects millions of people to continue using its videoconferencing platform. GameStop and other "meme" stocks AMC Entertainment and Koss shed about 1% and 4.4% after a sharp surge on Monday with no apparent news on the shares.