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Sunday, 17 December 2017

Some wider implications of bond volatility

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Bond market volatility is something we will become accustomed to and the gaps in market illiquidity will likely be eventually filled.

The more immediate implications are however that it will:

1) make those central banks that are itching to normalize policy cognizant of the risks of sparking a 1994 style bond selloff and

2) the prospect that the volatility helps to shift the investment pendulum from bonds toward equities.

It is too early for a wider asset allocation shift from bonds into equities to occur largely because a bond selloff does not equate to a bear market for bonds.

But for the Fed and BoE there will be a desire to communicate their intentions well in advance of any liftoff, which makes a surprise rate hike very unlikely.

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