In the US and Europe, a significant selloff of bonds has sent both yields and volatility soaring. The selloff was started in Germany, as German 10-year bonds are generally a benchmark used to price a wide range of assets. As German bond yields jumped sharply over the past two weeks, so has volatility in the bond market. The European Central Bank (ECB) announced earlier in the year that it would start a massive quantitative easing (QE) program that would see the purchase of many bonds. Some investors were betting that this would send yields into negative territory.
Although the success of the QE program in Europe is hard to quantify, some economic indicators suggested a partial recovery. Comments from Bill Gross that the '10-year German bund is the short of a lifetime' as well as a mixed economic data send the 10-Year German bund yield soaring and caught investors off guard. As the yields rose, investors jumped into the bond market, which in turn sent yields back down. The volatility in this alleged “safe haven” bond market also caught investors off guard. Most fund managers only use part of an investment portfolio for high risk or volatile assets. Since volatility increased in the once quiet bond market, there were less overall investments for the equities market.
Despite the sharp jump in bond market volatility, many analysts are predicting that the market will stabilise. David Absolon, investment director at Heartwood Investment Management, believes the bond market volatility was a needed correction. “We expect the recent market volatility is a result of repositioning rather than anything more sinister,” he said. “Nevertheless, a lot of investors have been feeling the pain in the short term,” he said.
Author: Imran Valibhoy
May 13, 2015
Since Joining the firm in 2006, Imran has worked on a range of M&A and Capital Market transactions in the natural resources, mining as well as projects in the renewable energy sector. Prior to joining Wise-owl, Imran worked at Euroz Securities in Perth, aiding in the advisory and valuation of companies in the mining and industrial sectors in Australia. Imran has a Masters in Banking & Finance from City University's Class Business School in London and a Bacheloor degree in Commerce from UWA.