A Different Kind of Risk-Off Has Treasuries Underperforming

The longest risk-off cycle since December 2016 marches on, now at 37 trading days. Treasuries have underperformed versus typical risk-off cycles. 

Comment

U.S. Treasuries are underperforming as the current risk-off cycle stretches to 37 trading days. We use the BofA Merrill Lynch global flows index, a measure of fund flows and volumes between safe and risk assets, to identify risk-on and -off cycles. The present period of risk-off flows began September 21 and is the longest risk-off cycle since December 2016. 

U.S. Treasuries have underperformed versus the typical move. The next chart shows changes in the U.S. 10yr yield during risk-off cycles since 2000. The current cycle is highlighted in orange, the median change in the thicker gray line. 

This time has been different, the 10yr yield is +12 bps versus a median change of -22 bps. Only two other cycles that lasted 37 trading days saw yields rise as much. One, highlighted in blue, saw yields soar after the 2016 presidential election. The other was a period from March to June of 2004. The next month of persistent risk-off cycles has been kind to Treasuries. The median change falls another 20 bps by day 60. 

Unusually strong preferences for short-term safe assets have been the differentiating feature of risk-off in 2018. We have more discussion of market moves after extreme risk-off flows, and our expectations for Treasuries and the yield curve, in our Weekly Roundup.