Hold on to your hats, folks (…or your shorts? Maybe not?). Volatility is back in bonds.
“Italian politics just did what a correction in U.S. equities and a breach of 3 percent on the U.S. 10-year yield could not: knocked the Treasury market out of its slumber.”
That rates volatility has jumped alongside its equity counterpart this time around may make investors more wary of holding leveraged positions and could also stress trading strategies that rely on implied and realized price swings to determine their exposure to the market.
The reaction of other markets was muted by comparison. Sure, stocks and the flakier end of European government bonds sold off, and there was a flight to the safety of U.S. Treasurys. But this wasn’t much more than a run-of-the-mill bad day, mostly reversed on Wednesday.
The surprise caught many off-guard. Case in point:
Bill Gross’s flagship fund dropped more than 3% Tuesday, an unusually big decline for a bond fund in just one day, and a sign of how the shockwaves from this week’s sudden moves in European markets are reverberating.