Traders are bracing themselves for continued increased volatility in the bond markets, following warnings from numerous buy-siders in recent weeks.
Strategists at Axa Investment Managers, BlackRock, Henderson Global Investors and Schroders have been voicing their concern at the prospect of wild fluctuations in prices due to ongoing illiquidity and the potential for interest rate rises.
It comes after volatility in global bond markets shot up in the first week of June as a result of changing investor sentiment and was fuelled by comments from the European Central Bank president Mario Draghi.
Meanwhile, the Merrill Lynch Option Volatility Estimate Index – which measures the implied volatility of US Treasury markets – rose from 82.7 on 29 May 2015 to 92.2 on 4 June 2015.
The volatility has not gone un-noticed.
Gareth Isaac, fixed income manager at Schroders, warned that periods of volatility are likely to become more common and are something that investors and traders should come to expect.
He said: “The recent turmoil is a sharp reminder of how illiquid the bond markets can be in times of stress.
“What we have seen may be a small indication of what we can expect if and when interest rates do begin to rise. As Mario Draghi suggested, volatility in the bond market is something we are going to have to get used to.”
Isaac’s views were echoed by several other fixed income specialists who are also bracing their investors for more of the same.
Phil Apel, head of fixed income at Henderson Global Investors, said hedge funds may also be partially to blame.
He said: “We think that the quantitative hedge fund community may be heavily involved in some of the moves seen over the past few months with a number of these funds profiting handsomely from the march of European yields to record lows.
“Knowing at which point they are looking for yields to move in the other direction is difficult to gauge, but if positioning switches en masse, we can expect choppy market conditions and potentially sharp moves higher in yields.
“Although we have not attached too much significance to this, Mario Draghi’s comments, to expect an increase in volatility in European government bond markets, might also be a factor.”