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.