bonds Markets

The Real Risk For Markets: The Bond Bubble Bursts

"[A] disorderly rise of interest rates could cause Wall St deleveraging... and a Main St recession".

Over the weekend, in the course of documenting what ended up being the best month for US government bond returns since 2008, we gingerly suggested that while a benign rise in yields would be highly desirable to the extent it would suggest slowdown/deflation worries are fading, a quick upward "correction" (i.e., a rapid bond selloff) could be highly destabilizing. Market participants have learned to fear tantrums in the post-crisis world. Central bank asset purchases have impaired the functioning of government bond markets (obviously more so in Japan and Europe than in the deep market for USTs) and with yields sometimes prone to overshooting to the downside, "tantrum" risk is always lurking in the background. Of course, that risk is larger or smaller depending on a variety of factors including positioning and the macro backdrop, but the point is, with everybody on one side of the boat after the mammoth bond rally, markets likely wouldn't be able to digest a rapid rise in yields with anything that even approximates alacrity. As we put it on Saturday, "one has to be concerned that any sudden bear steepening would risk kicking off a tantrum, which could be even worse than a continuat
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6 comments on “The Real Risk For Markets: The Bond Bubble Bursts

  1. wayback says:

    As some may not recall, one of the best returns last year was to be parked in a money mkt, collecting interest

  2. Oceasn views3 says:

    I recall reading that the current FFE indicates where the 2 yr ate will be a year from now. I’ll see if I can dig that up, and if so, looks like a wonderful yr ahead:

  3. broken cookie jar says:

    Is the Bond Mkt broken or the Fed, or what?

  4. Gnine says:

    Will the recent gold surge abate if yield rise?

  5. jyl says:

    It sounds like the danger scenario is that something causes an initial bond price decline, that triggers a big bond selloff, that tightens financial conditions when looser is needed.

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