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
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