Our eye on a chart - Bonds: now riskier than ever  

Published on November, 16th 2021Market and research

Stéphanie BIGOU

Portfolio Manager

For Professional Clients in accordance with MIFID

Written on 15th November 2021 by Seeyond

Let’s look at the facts:

  • Volatility on the government bond markets has increased sharply, across regions.
  • This is illustrated by German bonds: the volatility of the 5-year/30-year spread reached a 10-year record in November.

What do we think?:

  • It’s a bit of a cat and mouse situation between central banks and investors. The Fed affirms it has changed its paradigm and will only change its monetary bias once inflation has truly returned, but the market doesn’t believe it. Also, the Fed keeps explaining that the current inflation is largely temporary, but the market thinks the contrary.
  • There is also a generational gap between the Fed and the market. Few investors have experience with inflation and have built their careers in deflationary times. Inflation scares them.
  • This misalignment between central banks and investors should contribute to higher volatility for a while, making bonds increasingly risky.
  • Gradually allocations of large global portfolios could move towards less bonds, more equities and more money markets.
  • The 5-year/30-year spread is a very popular trade among hedge funds, amplifying potential losses as well as reversal risk. This obviously amplifies short-term volatility.

Source: Bloomberg, Seeyond – Data from August 2012 to November 2021

Source: Bloomberg, Seeyond – Data from August 2012 to November 2021 –  Daily

This article has been provided for information purposes only to professional clients as defined in the MiFID Directive. It must not be used for retail investors. The provision of this material or reference to specific sectors or markets in his article does not constitute investment advice or a recommendation or an offer to buy or sell any security. Investors should consider the investment objectives, risks, and expenses of any investment carefully before investing. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article.