SBNY - Is a deep recession looming? Bond market thinks so but stocks shrug off risk

2023-04-10 11:49:31 ET

The stock market is calling the bond market's bluff with respect to prospects of a severe economic downturn.

When the tumult in the banking sector emerged last month, the ICE BofA MOVE Index, a gauge for expected swings in Treasury bonds using one-month options, jumped to its highest since the 2008 Great Recession, according to data from Bloomberg.

That, in turn, opened the gap between stock and bond volatility in 15 years, as equity investors brushed aside fears of contagion after the failure of Silicon Valley Bank ( OTC:SIVBQ ), Signature Bank ( OTC:SBNY ), and Silvergate Capital ( SI ).

The index remained over double its average over the past 10 years even after banking jitters eased somewhat.

“It’s just a matter of time until the VIX ( VIX ) picks up,” Harley Bassman, managing partner at Simplify Asset Management and creator of the MOVE index, told Bloomberg. “Over the past thirty years we’ve seen large correlation between the shape of the yield curve, credit spreads an implied volatility – and I mean all the volatility measures including the VIX and MOVE. The whole pack of the risk metrics are very correlated over the long term.”

The bond market was pricing in a recession even before the banking stresses took hold as shorter-maturity bonds ( US2Y ) yielded higher than those of longer-term ones ( US10Y ). That was when the main recessionary risk involved inflation and the Federal Reserve's aggressive interest-rate increases, in that the U.S. could slide into a recession should rates become too restrictive.

But now bond-market investors deem stresses in the financial system as their primary menace. Over a three-day span in March, the policy-sensitive two-year UST yield ( US2Y ) dropped a full percentage point -- the most since 1982, Bloomberg highlighted. The two-year was off 43 basis points since the start of 2023. By comparison, the forward-looking stock market ( SP500 ) took a relatively modest hit last month, but has since erased those losses and remained 7% higher year-to-date.

Last week, (Apr. 6) JPMorgan CEO Jamie Dimon told CNN in an interview that the banking stresses does boost the chance of a recession .

More on the Potential Recession and the Bank Crisis

• IVOL: A Buy If You Think Recession Is Imminent
• Are Recession Worries Overshadowing Market Opportunities?
• Bank Stocks - The Truth About Unrealized Losses
• Buffett Loves These 3 Banks, And So Should You

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