Investors have been told to brace for further fixed income market volatility even as managers suggest this month’s spike in yields is not “the big one” for bonds.
Sovereign bond markets’ sell-off began on September 9, the day after European Central Bank president Mario Draghi disappointed investors by failing to commit to further monetary policy easing.
That prompted a slump in European government bond prices, and other markets also suffered. Japanese government debt prices, which had already been dropping since July following similar doubts about the Bank of Japan’s (BoJ) ability to loosen policy once again, accelerated their decline.
Yields on 30-year Japanese sovereign bonds had risen from a record low of 0.05 per cent in early July to 0.53 per cent by the start of last week before falling back slightly.
In Europe, 10-year German bund yields turned positive for the first time since before Brexit. The spike has reduced the global stock of negative yielding debt by about $1trn to $12.6trn, according to figures from Tradeweb.
Chris Iggo, chief investment officer for fixed income at Axa Investment Managers, suggested bond investors may not have much choice but to accept central bank activity as it comes – and the corresponding rapid dips.
“I don’t know if this is the turning point, but it’s an example of how, even though over the next six months things could be stable, you’ll get periods where volatility picks up.”
Mr Iggo said the magnitude of the sell-off was not as extreme as the “taper tantrum” three years ago, when US Treasury yields jumped as the Federal Reserve signalled it would begin unwinding its own QE programme.
However, Mark Benstead, a fixed income portfolio manager at Legal & General Investment Management (LGIM), was happy to take the comparison further.
“This feels like something more than 2013’s taper tantrum, given the diminishing marginal utility of ‘traditional’ QE policy on growth and inflation expectation policy objectives.
“There has been speculation about the need for authorities to pass the baton from monetary to fiscal policy in the US, UK and Japan,” he added.
Fidelity’s fixed income investment director Andrea Iannelli suggested recent activity could be more of a price correction and added that similar, if not worse, bouts of uncertainty are likely to continue.
But he added: “Valuations are now more in line with fundamentals, having adjusted from what were arguably expensive levels. This is not, however, the ‘big one’ or the big sell-off in fixed income that some investors have been talking about for years now.
“Going back to fundamentals, we are still in a low-growth, low-inflation environment. Central banks will remain engaged, leaving little room for yields to rise significantly from here.”
LGIM’s Mr Benstead agreed: “Given underlying demand we believe any sell-off to be capped and a buying opportunity.”
The Fed meets this week to decide whether to raise rates, and Mr Iannelli said investors should also take note of the BoJ’s upcoming meeting as the central bank often acted as a test case for unusual monetary policy measures.
The BoJ may yet disappoint. Part of the motivation for the recent sell-off in Japanese debt appears to have stemmed from BoJ governor Haruhiko Kuroda declining to ease policy at the start of the summer, instead committing to a “comprehensive assessment” of monetary policy.
The outcome of the review is due to be presented this week; in the interim, investors have been given conflicting signals as to the bank’s intentions.
“This week’s BoJ meeting will be on many central bankers’ radar,” Mr Iannelli said.
KEY NUMBERS
$1trn: Decrease in amount of negative yielding debt in week to September 15, according to Tradeweb
September 20-21: Date of this month’s Federal Reserve and Bank of Japan policy meetings
