Monday, October 20, 2014

BIS Fears Bond Panic

In a BIS report by Guy Debelle there are warnings of the risk of a bond panic.  A few interesting parts extracted below:

When volatility returns, for a number of reasons, including those I have already mentioned, it may well rise quite rapidly.

But if we look back at previous market sell-offs, when market-making capacity was larger, we see that they were often quite violent too.

There are a few other reasons to suspect that the sell-off, particularly in fixed income, could be relatively violent when it comes.

But there are probably a sizeable number of investors who are presuming they can exit their positions ahead of any sell-off. History tells us that this is generally not a successful strategy.  The exits tend to get jammed unexpectedly and rapidly.

Another reason to suspect that the sell-off might be violent is the starting point, namely zero nominal interest rates. That is a point we haven’t started from before (with the possible exception of Japan).

So there is a fair chance that volatility will feed on itself. One should always be careful of looking for too much rationality in trying to understand market dynamics. Given the lack of rational arguments for the current state of affairs, trying to rationally explain how it will unwind is also going to be difficult. 
So in conclusion, there are a number of anomalies present in financial markets in terms of pricing and volatility. There are also some misplaced perceptions amongst market participants about the degree of liquidity present in some market segments. That strikes me as a dangerous combination and unlikely to be resolved smoothly.
I also think a bond panic will feed on itself.  I think the end result will be that the central bank makes lots of new money and buys up lots of bonds, and the value of the currency goes down.


  1. Any bond panic can be controlled and offset by central bank buying but a currency panic can't. Another additional QE coming up in Japan. Yen weekens further. Things look interesting.


  2. If the central bank buys as others panic out of the bonds, then there will be a currency crash and it will look like bonds are ok, in that currency. But the crashing currency really makes people holding 20 year bonds want to get out. So the central bank can't really stop it, unless they held lots of real assets, but these days they don't.

    Yes, I noticed the Yen/USD is down 2.57% in the last 24 hours. Interesting indeed. I also noticed that they are buying ETFs for stocks and real estate. This helps give the Yen some real backing, but they are increasing the government bond buying so much that it still seems the Yen is doomed.

    1. I look back 5 minutes later and now it is down 2.67%. Hum.

    2. Down 3.1% at one point but closed down 2.7%. A big move.

    3. Yes, something is also going on in the precious metals market with extreme movements in the mining sector. My best guess is that it is about to turn.

      I know you are interested in collecting different theories on the subject of inflation. Have you read this:

      It's rather long but interesting, I can recommend part 4 and 5.

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Looking for polite debate on ideas. Never attack a person. Be nice.