The Calm Before the Storm: Turmoil in the Bond Market

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While the stock market remains relatively stable, the bond market is experiencing turmoil as the yield on 10-year U.S. Treasuries surpasses 5% for the first time since 2007.

It may be easy to forget that fact. Coverage of the bond market doesn’t kick off any nightly newscasts. We don’t see any images of ashen-faced bond traders emerging from office towers with banker’s boxes in their hands. And few retail investors are likely tracking their paper losses in bond holdings by the hour.

What is striking about the global rout in bonds is how calm it seems. Three years in – depending on how you measure it – and nobody seems to be freaking out. U.S. bond yields are crucial benchmarks on a universal scale, helping establish pricing on loans and securities around the world. A sharp rise in yields has a great dampening effect that permeates the global economy. It puts downward pressure on risk assets of all kinds, from stocks to commodities to cryptocurrencies. Existing bonds get devalued, since prices and yields move in opposite directions, dealing a blow to the retirement plans of countless everyday investors.

The closest precedent is a 19-per-cent drop that began in 1860, just before the start of the U.S. Civil War, according to Bank of America, which concluded that today’s bond selloff ranks as “the greatest Treasury bear market of all time.” “I promise you, if the equity market lost anything like that, you would hear about it,” said Ian Pollick, head of fixed income, currency and commodities strategy at Canadian Imperial Bank of Commerce.Why the lack of panic about the bond bear market? One explanation is that the average investor is far more attuned to the ups and downs of the stock market. There is an emotional attachment.

 

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