(Bloomberg) — Investors in the safest bond markets have been rocked by some of the most dramatic volatility on record, and given the risks there are likely more turbulence in store.
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Money moved into these havens as panicked trading and thin liquidity fueled US banks' concerns that spread around the world last week. Policymakers' intervention then helped ease nerves, battering bondholders with more volatility as yields went into reverse.
Mark Dowding, chief investment officer at Bluebay Asset Management, said: “Time seems to have been sped up and the markets are on steroids in terms of moves that could have lasted several months now unfolding in literally a few hours. Used to be.” “It can feel very exhausting.”
For those tempted to reload positions, the volatility isn't over yet. The Federal Reserve makes its policy decision on Wednesday, with markets betting on a half-point hike and the first pause in years. Add to the risk that turmoil in the banking sector will tip the global economy into recession, and the road ahead looks rocky.
Here are five charts showing the major moves in the rates markets:
80s retro
The move in short-maturity US Treasuries was the biggest in 40 years as worries over a new financial crisis took flight in the world's safest asset. The two-year yield declined 61 basis points, the most since 1982, when the Fed's Paul Volcker lowered rates amid a recession.
The Berlin Wall
In Europe, both short- and long-maturity German bonds broke records. Two-year bonds led the surge, with yields falling the most since Germany's reunification data on Monday showed in 1990, and then topped Wednesday's 48 basis-point collapse.
volatility cocktail
The volatility in bonds was the biggest since the 2008 financial crisis. They were also driven by the ever-changing currency market bets on how central banks would respond to banking turmoil.
In Europe, a gauge of expected interest-rate volatility climbed toward a record high in 2022, when central banks begin making jumbo hikes. While the European Central Bank promised a 50 basis-point hike on Thursday, the jury is still out on how the Fed and BOE will respond in the coming week.
“A nasty cocktail of inflation, financial stability risks for central banks and communication challenges are supporting volatility in rates,” said Tanveer Sandhu, chief global derivatives strategist at Bloomberg Intelligence. “Increased uncertainty over the path of policy rates will keep volatility elevated but these extreme levels are volatile over time.”
Rajdhani Stall
Amidst the volatility, plans to raise capital were put on hold. In the US and Europe, it was the first Monday this year without deals, except for holidays, after the weekend collapse of US lenders.
Sales of new bonds declined during the week in Europe, which lagged well behind market participants' original expectations. Uncertainty ahead of the Fed's decision is expected to hamper activity again in the coming week, according to a Bloomberg News poll.
dash for cash
A dash for the cash-led banks to borrow $164.8 billion from the two Fed backstop facilities. This was a sign of heightened funding stress across the region following the Silicon Valley Bank failure, driven by losses in bond portfolios and depositors pulling out money.
Data published by the Fed showed $152.85 billion in borrowing from the discount window – the traditional liquidity backstop for banks – in the week ended March 15. The previous record was reached at $111 billion during the 2008 financial crisis.
– With assistance from Vassilis Karamanis, Paul Cohen and Colin Keating.
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