Based on Credit-Suisse's Panic-Euphoria model of risk appetite, US bond markets are on the verge of the short-term capitulative "Panic" mode. Each time we have reached this level of 'selling' in the last 6 years, Treasury yields have compressed significantly. At the same time, equity risk appetite remains bearish and US credit risk appetite has resumed its decline (but relative to Treasuries they are significantly over-sold). Not a pretty picture...
Bonds hit "Panic" levels of risk appetite...
[4]
but Equity risk appetite drifts bearishly...
[5]
and Credit risk appetite signficantly weaker...
[6]
but the sell-off in High-Grade and High-Yield bonds has been remarkable relative to historical precedent...
As Citi notes,
Investors fear the 1994 redux trade, are looking at ways to short markets that may be vulnerable to rising rates, including credit. But in total return terms the credit space has already suffered quite dramatically. The chart below shows that the high-grade and high-yield markets are down 3.2% and 1.7%, respectively, since the Treasury backup began in early May, which is far more severe than what normally occurs when rates rise (annualized long-term average of +0.1% and +11.4%, respectively).
[7]
It may not be fully priced in yet, but at this point the rates trade may really boil down to how quickly Treasury yields rise further.
Charts: Credit Suisse and Citi