Bond Crash is neither obvious nor ongoing

“It’s time to rethink the bond market, Bonds are quietly crashing around the world, Is the huge bond wave about to crash?” here are some of the most striking business media headlines in recent days, apart from these about the endless Greek crisis. While all seems for the best in almost the best of all worlds – ECB’s massive QE, driving US economic growth, stock markets records – one now finds out that a crash is impending. Worse, it’s a bond crash that means it is more difficult to understand and likelier to be involuntarily ignored by most of the general public. “We have attended a strong correction of bond markets’ yield for at least a month. It means the 10-year German bond yield which was at 0.07 percent on April 21, 2015 now stands at 0.70 percent,” Bernard Keppenne, Chief Economist with CBC Banque & Assurance told Cyceon.

“Comforted by the bond-buying program started since March 2015 by the ECB, the bond market makers have felt that yields would continue to inexorably decrease even though they had already reached extreme lows,” he added. “This decrease (towards zero and even below zero – which was unprecedented) was fueled by the launching of ECB’s massive QE but it has been accentuated by investors who have sought to benefit from this opportunity,” confirmed Nicolas Chéron, Strategist with CMC Markets, according to whom this has been a bond market disruption orchestrated by the ECB itself. A sudden lack of interest combined with slight inflationary pressures resulting from oil prices rebound has increased yield and lowered bond prices, Keppenne underlined.

As a result, volatility and risk taking by investors have increased in the markets, encouraging a slight bond correction offset by equity reaching new records high. From a macroeconomic standpoint, Bernard Keppenne said, “this correction didn’t bring any major change to the data since short term rates have not evolved and long term rates have stood at extremely low levels.” What about the famous crash then? “The strong rebound in bond rates was predictable,” stressed Nicolas Chéron, citing Janus Capital star fund manager Bill Gross’ anticipation for instance. In the end, this is simply the downward trend in yields for a long time that explained the increase over the last few weeks. Thus one cannot talk properly about a “crash (since there has been no) outstanding gap,” Chéron found. German, Belgian or Dutch 5-year bonds negative yield have built the excess. “Talking about a bond mini-crash appeared excessive to me,” Keppenne concluded.