Buckle up and get ready for more bond market volatility. That’s the message from Westpac’s New York based strategist Richard Franulovich who says that history suggests the rout, which saw 10-year bond rates trade up to 6 months highs, is not yet over.
In a note to clients, Franulovich said that even though global bond markets appear to be stabilising, “historical analogs suggest that the bund-led bond market sell-off may not be complete”.
He highlighted that in 2003, “JGB yields rose about 120bp in the space of barely three months” while during the ‘taper tantrum’ in 2013 “US 10yr yields rose about 110bp in three months”.
He added that after the hiatus in selling, yields continued to march upwards for a full four months, taking them a good 140bp higher.
Key to Franulovich’s analysis is that the pictorial analogues have a grounding in a similarity between market conditions at the time of these three periods of acute selling. That is, “monetary policy was exceptionally accommodative and bond market volatility was low to non-existent…bond yields had been falling steadily in the weeks leading up to the meltdown.
“JGBs yields had fallen to historic lows just ahead of their sharp 2003 sell-off while US yields were very close to generational lows going into the 2013 taper tantrum.”
That means that there is more bund selling to come, according to Franulovich, who says that “against these basic metrics the rise in bund yields appears to have further to run. Historical analogs suggest that we may be about half-way there both in terms of magnitude and duration.”
If Franulovich is right that also means more stock, commodity and forex volatility is coming as well.