There is likely that there will be more turbulence in the future due to the risks out there, and investors across the safest bond markets have been rocked by some of the most dramatic swings on record.
The worry over US banks spread around the world in the past week has led to the outsize moves, leading to a panicked trading and thin liquidity. Policymaker interventions helped ease nerves, battering bondholders with more volatility as yields went into reverse.
Mark Dowding, chief investment officer at BlueBay Asset Management said that time feels like it has been sped up and markets are on steroids in terms of moves that may have played out over several months, now manifesting in literally a few hours. This can feel exhausting. The instability isn't over yet for those tempted to reload positions. The Federal ReserveFederal Reserve makes its policy decision on Wednesday, with markets slurching between bets on a half-point hike and the first pause in a year. The path ahead looks rocky because of the risk that the banking sector will tip the global economy into a recession.
Here are five charts showing key moves across rates markets:
The move in US short maturity US Treasuries was the biggest in 40 years, as concerns over a new financial crisis drove a flight to assets seen as the world's safest. The Fed spokesman Paul Volcker slashed rates, causing yields to fall 61 basis points, the most since 1982.
In Europe, both short- and long-maturity German bonds broke records. Two-year bonds led the surge, with yields falling the most in data going back to Germany's reunification in 1990 and then topping that with a 48 basis-point collapse Wednesday.
Since the financial crisis of 2008, the swings across bonds were the biggest since. They were driven by changing money market bets on how central banks would respond to the banking turmoil.
In Europe, a gauge of expected interest-rate volatility climbed to the highs recorded in 2022 when central banks started making jumbo hikes. The jury is still not certain how the Fed and BOE will respond in the coming week, despite the European Central Bank sticking to a 50 basis-point increase Thursday.
The bad cocktail of inflation, financial stability risks and communication challenges for central banks is supporting rates volatility, said Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence. The uncertainty on the path of policy rates will keep volatility elevated but these extreme levels are unsustainable over time. Plans to raise capital were put on hold due to the volatility. After the weekend collapse of US banks, it was the first Monday without a deal this year in the US and Europe.
The sales of new bonds fell through the week in Europe, lagging the original expectations of market participants. According to Bloomberg News, the uncertainty ahead of the Fed decision is expected to hamper activity in the coming week.
A dash for cash led banks to borrow $164.8 billion from two Fed backstop facilities. The Fed released data showing $152.85 billion in borrowing from the discount window, the traditional backstop for banks, in the week ending March 15, a record high. The previous record was $111 billion reached during the 2008 financial crisis.
With the help of Colin Keatinge, Paul Cohen and Vassilis Karamanis.