The crack that appeared in US and European bond markets about a month ago is a stark reminder of how gains can be rapidly erased when market sentiment turns sour. The value of global fixed income markets dropped by an estimated US$400 billion during this rout. The primary reasons for this sell down are well documented:

  • An uptick in oil price to above US$60 a barrel on 5th May raised inflation expectations;
  • Concerns over the expected rate hike by the US Federal Reserve;
  • USD weakness brought about by slower 1st Quarter growth lead to an unwinding of the Euro carry trade. As investors would have borrowed Euros to buy European government bonds, this added selling pressure in the European bond market;
  • The continuing Greek drama and their inconclusive negotiations with the EU, ECB and IMF took some of the shine off investors’ enthusiasm for European assets;
  • Negative yielding German bunds that made Bill Gross call German 10-year bunds “the short of a life time”; and
  • Reduced bond market liquidity as banks adjust to stricter regulatory requirements.

Prices have since rebounded in global government bond markets as it became clear that there is still no whiff of inflation, the ECB is committed to its asset purchase program and China has joined Japan and Europe in printing money. Nonetheless, this recent rout in global bond markets is a foreshadow of what can happen if renewed inflation expectations, market liquidity concerns, a knee jerk reaction to a US Federal Reserve rate hike and/or a black swan event come together in a perfect storm. Going forward, we expect that any negative pressure on asset prices will see selling momentum gather speed quickly. There remains an underlying fragility to investor sentiment.

© Jachin Capital Pte Ltd

UEN: 201419754M


The contents of this document are for information only and is taken or compiled from sources that we, Jachin Capital Pte Ltd, believe to be reliable. To the maximum extent permitted by law, we do not make any representation or warranty (express or implied) that this information is accurate, timely or complete and it should not be relied upon as such. Opinions expressed are our current opinions as at the date of this document only and are subject to change without notice. We endeavour to update on a reasonable basis the information discussed but regulatory, compliance or other reasons may prevent us from doing so. The publication and distribution of this document is not and does not imply any form of endorsement of any person, entity, service or product described or appearing here. This is not and does not constitute or form an offer to buy or sell nor the solicitation of an offer to buy or sell any security or financial instrument nor to participate in any particular trading or investment strategy. We are not soliciting any action based on this document. The information, services and products described or appearing here are intended only for Accredited Investors (as currently defined in the Securities and Futures Act) and are not intended for nor targeted at the public in any specific jurisdiction. This information does not take into account the particular investment objectives, financial situations or needs of individual investors. Investors should seek independent financial, tax or legal advice or make independent investigations as considered necessary or appropriate before making an investment decision. Investments involve risk. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment instrument.

Essential SSL