Complacent investors may see bond markets stage a tantrum that could bring back memories of volatility flare-ups from the last few years.
In a Friday research note, the global markets strategist for JPMorgan said one of the consequences of low interest rate policies by major central banks has been the increased frequency of surges in volatility as ill-prepared market participants, who made wagers assuming volatility would remain low, scrambled to cap their risk exposures from sharp bond-market moves.
He also cited the deterioration in bond-market liquidity and outsized risk-taking in low volatility periods as potential contributors to the next VaR shock. The 1-month Merrill Lynch MOVE index, which tracks the one-month implied volatility for the 10-year Treasury note yield, was around 65 last Friday, around similar levels when bond yields slumped in December as part of a larger multi-month slide.Analysts at JPMorgan also say that a 60 basis points decline in global bond yields this year would prove “unsustainable,” according to the bank’s index tracking sovereign debt in developed markets.