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Bonds ‘boring’ no longer as unpredictability returns By Reuters


© Reuters. FILEPHOTO: This June 22, 2017, illustration photo shows the British Pound Sterling as well as U.S. dollar notes. REUTERS/Thomas White/Illustration

By Dhara Ranasinghe

LONDON (Reuters) – Erratic and volatile, with positioning swinging from one extreme to another: a new norm is taking hold in the world’s biggest debt markets which for years saw activity crushed by the hefty presence of central banks.

BofA estimates that bond-buying stimuli continues to be a strong downward force in borrowing costs. The balance sheets of six central banks now amount to nearly $30 trillion. This is an increase from the under $10 trillion recorded in 2008.

The unusually high swings in sovereign yields this year show that investors are not used to low volatility.

Consider the U.S. Treasury Market, which is worth $22 trillion and of which roughly 20% are held by the Federal Reserve. Investors have been in net short for about 2 1/2 years. This is basically a bet that prices will go down. Since June 2020 investors have alternated between short and long positions.

For a graphic on Net positioning in the US Treasury market:

The price moves reflect perhaps the lack of clarity over what will follow the four-decade bond bull-run.

In the six weeks leading up to March, Treasury 10-year yields rose 60 basis points and reached a peak of 1.78%. They then tumbled almost to 1% in July, before rising back above 1.3% in August..

“Fixed income investors are meant to be the boring investors… they are not the ones that strike you as the aggressive types that want to roll the dice every morning, so why are they doing that now?,” said Ludovic Colin, a senior portfolio manager at Swiss asset manager Vontobel.

These are the explanations that many investors, like Colin, offer.

First, although COVID-related uncertainty is a story for 2020, this year’s virus mutations have made it more difficult to forecast the economy and its implications for central bankers.

Reuters polled economists to forecast a U.S. GDP increase of approximately 2% for 2021. That figure rose to 4% last April, fell a bit before falling back at 5% in February, and then at 6% or more in May.

Second, the major economies debate whether long-dormant inflation is coming back for the first times since years.

BlueBay Asset Management CIO Mark Dowding explained that all this implies “a lot of guesswork”.

This can cause yields to fluctuate between one end, as in Q1, where everyone was optimistic, and another when pessimism returns. This pattern will probably continue until there is clarity.

This is true even in Germany where the European Central Bank owns about a third the bond market. It will be difficult to wager that yields would fall.

Bunds are ten year debts. In May the yields rose to -0.07%, just a few months away from turning positive. Then, they dropped to a six month low of -0.52%.

According to one indicator that measures the daily movement between the Bund futures prices, September looks to be the most volatile since April 2020.

The ECB’s hawkish chorus calling for more stimulus cut was what drove yields higher, but the bank later struck a dovish note during its most recent meeting.

Mike Riddell is the head of macro at Allianz Global Investors (DE) and expects that volatility shocks could follow recent swings.

He said that central banks had not eliminated volatility.

For a graphic on Volatility in German Bund futures rises:


With central bank activity still dominating bond markets, volatility is unlikely to spiral too much. Either is this not evident in market-based gauges, such as MOVE which has only slightly increased this year.

Colin Vontobel stated that the 2021 bond selloffs were likely to have been triggered in part by an inflation rethink. Hedge funds are quick to grab signs of greater price growth.

Colin said that the quick-buck men jumped on the argument and forced long-term investors to pay attention. This is how you get this extreme position on bonds, with yields rising earlier in 2019.

Eurekahedge data shows that first was not synonymous with top returns. Fixed income and macro strategies experienced gains of 4.6%, 3.8% and 3.8% between January and July 2021.

The broader index of hedge funds, however, rose by 8%.

Bethany Payne is Janus Henderson Investors’ global bonds portfolio manager. Greater market swings can also raise the stakes, making mainstream investors more agile.

She said “… Investors must move fast or you will be out of it. It’s usually happened in a matter of days.

For a graphic on Government bond trading volumes rising: