The extremely violent movement we have witnessed in the world of bonds in recent weeks inevitably raises doubts and old fears: after a very long period in which the bond market remained as if anesthetized, a prisoner of a golden cage, the awakening was abrupt and potentially painful but perhaps even healthy because it shakes investors from the recent torpor by recalling how sometimes there can be moments of high volatility even on bonds.
Of course, it must be said that when the ten-year German government rate goes from just over zero to over 0.75% in a few days, some doubts about the intrinsic meaning of these numbers honestly surface. If a financial value in a few hours can in fact change order of magnitude with price excursions in which doubling or tenfold are the effect of a handful of exchanges, a moment of reflection is in order.
In the world of global Quantitative Easing in which 2015 is the year of Europe in this very long relay where the main central banks are passing the baton, the level of interest rates appears somewhat artificial. Nothing particularly surprising in the post-Lehman era in which central banks have assumed an increasingly important role in the dynamics of financial markets: however, when a financial value is guided more by flows than by fundamentals, the risk of extremely violent waves of volatility is always lurking and the bond world is no exception.
The only real difference is that such exaggerated volatility does more harm on bonds because it often takes the investor by surprise and because it is "psychologically" more difficult to digest. After all, however, a context in which an important part of the government bonds of developed countries trades at negative nominal rates somehow imposes a rethinking of the approach to bond investment, where inevitably the traditional drawer approach must leave room for a more dynamic.
However, it remains surprising how to date the nominal levels of long-term rates in Europe are higher than at the time of the announcement of QE by the ECB: if with hindsight we can say that perhaps a German XNUMX-year zero was objectively stretched and the result of an overcrowded trade, after the earthquake of the last few weeks in which all longs ran to close their positions, today the positioning of investors appears more balanced.
The hope is that from the current levels we will move following the evolution of the economic data: the apparent contradiction between QE and interest rate movements could in reality also hide a newfound "confidence" in the reflationary effects of the QE itself which would lead to a of the highest rates. Though sensible, I don't think this is the explanation for the recent movement: this time I think it is more linked to a "crowded" positioning than to a real belief in the direction of the European economy: there will be time for this in the coming months/years.
