ChartBrief #16 Breadth in Bonds
What happens if you take a fairly well understood, well-functioning and widely used technical analytical method from the stock market and apply it to something completely different? Well today we answer that question by taking measures of stock market breadth, namely 50-day and 200-day moving average breadth, and applying it to sovereign bonds. Thus below we have a chart of global sovereign bond breadth.
The first point to note is that the analysis uses bond yields, and since bond yields move inversely to bond prices we are thus looking at bond yields upside down. By this I mean for 50dma breadth instead of % proportion of bond yields trading *above* their 50 day moving average, it will be % of bond yields trading **below** their 50 day moving average. Therefore when these indicators are running close to 100% it means broad strength in the bond market, and when they track close to 0% it means global bond markets are selling off and yields are heading higher.
The best way to illustrate it is to look at the chart where the "taper tantrum" and "bund tantrum" labels are. Both of these episodes were major and broad-based global bond market crashes. The taper tantrum was triggered by the Fed hinting at tapering its QE program, while the bund tantrum was a logical conclusion of bonds getting over-stretched out of line with fundamentals (arguably that one was also triggered by an infamous Bill Gross tweet).
Bottom line: Global sovereign bond breadth presents an interesting view into global bonds, the recent bond market tremor was nothing compared to the bund and taper tantrums, but it could be a shot across the bows.