The bond market is the truth. So goes the old saying. It is also very helpful. Bond traders are often looking ahead and signs of stress in markets often appear in the bond markets first. If bond and equity markets disagree, then the general rule of thumb is this, go with the bond market.
The recent stress in the GBP
The bond market was also very helpful in recent trade on the GBP. When the UK announced the mini-budget the UK gilt market showed signs of stress. How? Well, when bond yields rise for negative reasons that is a bond market showing distress. In fact, around the time that Rishi Sunak and Liz Truss were in hustings the end market on Liz Truss’s comments on changing the BoE mandate. How that was a sign of things to come!
So, the bond market in distress sent the GBP sharply lower. However, on Monday October 17 Jeremy Hunt announced the reversal of the previous chancellor’s fiscal plan. What do we make of it? The approach was to look at the bond market. The verdict from the UK gilt (market) was this – reassured. So, this gave confidence for some short-term GBPUSD longs on a break higher towards the next pivot zone. See below.
Now, this situation with the GBP and the bond market was unique in the sense that usually rising yields are normally positive for a currency. However, when yields rise because of ‘distress’ it isn’t. However, the main point to take away is that the reaction of the bond market was very helpful. Here is one other market to watch – the US bond market. If US bond yields start falling sharply then, in the current market environment, many investors will expect US stocks to rise alongside USD weakness. So, keep an eye on US treasury yields falling on any hints of slowing Fed policy for a potential pop higher in the S&P500.