Volatility in Bond Markets

After the ECB press conference last week, Jeff Keen examines the volatility in bond markets

Global investors often refer to the volatility in markets.  This comes in the form of perceived uncertainty but also the price variability of financial markets.  Bond markets which are supposed to be less volatile and make up the safer part of portfolios are not generally thought of as volatile.  But this depends on how you measure volatility.  Price volatility has not changed materially over the years but when you compare the intraday price changes on 10th March (following the ECB press conference) with the potential returns, modest price changes look quite different.

The 10 year Bund traded at a yield of around 0.2% prior to Draghi’s announcement last week.  Within a few hours, the bonds had lost about 0.8% in price terms.  Not very significant compared to the gyrations seen in the equity markets.  For example the Italian FTSE MIB index rose 4.4% and then lost all those gains by the close.  However, if you consider that the Bund investor is looking forward to the prospect of earning a cumulative total return over 10 years of around 2%, losing 0.8% represents losing 40% of the 10 year return over just a few hours.

Investors who have been persuaded to move along the yield curve in order to find positive yields, need to decide whether the returns on offer are worth the short term volatility they will suffer over the medium term.  Government bonds should no longer be regarded as risk free.

All data sourced from Thomson Datastream

Risk Warnings

The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions.  The information provided does not constitute investment advice and it should not be relied on as such.  All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise.  Capital security is not guaranteed

The information relating to ‘yield’ is for indicative purposes only.  You should note that yields on investments may fall or rise dependent on the performance of the underlying investment and more specifically the performance of the financial markets.  As such, no warranty can be given that the expressed yields will consistently attain such levels over any given period.

Changes in rates of exchange may have an adverse effect on the value, price or income of an investment.