Bond Markets Herald an End to Cheap Government Debt
Bond markets got choppy at the end of April, when institutional investors began lining up to bet against the market. Since then the situation has gotten worse for bond holders, as spiking yields in Germany, and even US Treasuries, have created a rush for the exit that some fear could turn into a stampede.
Volatility seems to be the new normal for bond markets after a long period of relative calm, and the trend will persist through the Fed’s expected interest rate hike in late 2015/early 2016. On Thursday the 10-year German bund yield reached 2015 highs of 0.995 percent, having languished as low as 0.049 percent just two months ago. It settled back down to 0.84 percent by end-of-trading on Friday.
Spiking yields are sending bond prices lower as holdings from an era of near-zero interest rates begin to lose their appeal. In a reversal of the usual order of things, the German bond market seems to be setting the tone for markets in the US and UK. Treasury yields were spiking alongside the German bund early Thursday, and the 10-year US Treasury yield closed at around 2.4 percent Friday – it’s highest since October of last year.
The reason behind the sudden volatility has divided market watchers. One possible explanation is that euro zone inflation came in at 0.3% for May, up from 0% in April. This suggests stubborn inflationary pressures that, even with low energy prices, will preclude the wave of global deflation that some traders have been betting on. If inflation is back, it doesn’t make sense to hold government debt with borderline negative yields.
…click on the above link to read the rest of the article…
