Fixed income "volatility vortex" - Can this macro-prudential risk continue?

Bond markets moved to extremes with yields touching for the 10-year only to see a 15-bps reversal in a day. Treasury futures were oversold and the BOE intervention in the gilts markets gave the market a reason to cut risk positions. With inflation numbers coming out at the end of the week, bond traders may want to square risk given an inflation surprise could see traders wrong-footed. Nevertheless, the overall conditions for the Treasury market are near crisis levels.

1. Market volatility is at crisis levels. The MOVE index is at the same levels as March 2020 and just below the 2008 crisis.

2. Treasury liquidity, as measured by yield error, is just below March 2020 levels and way above levels for a safe asset.

3. Fixed income performance is nothing like a safe asset. This is the worst year-to-date performance recorded for the Global Aggregate index, and there is little reason to expect a rally.

4. The drawdowns across different maturity spectrum are the worst recorded. For example, the 10-year Treasury drawdown is beyond 20% and the 30-year drawdown is closing in on 40%. 

Call this the end of the long-term bond rally and the era of repriced bond risk. The question is whether the Fed will hold its resolve in the face of macro-prudential risks within the Treasury markets.