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Capital Markets

Rates volatility shows the risk in duration

The February sell-off in US treasuries was short-lived, but it highlights the dangers in long-dated bonds.

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Photo: iStock

The spike in 10-year Treasury yields in the final week of February briefly looked as if it might pop the everything bubble in equity and bond markets that central banks have inflated in their desperate efforts to limit the cost of servicing swollen government debts.

Mark Haefele, chief investment officer of global wealth management at UBS, suggests: “Rising real yields, rather than inflation expectations, were responsible for the increase, and it is the speed of the move rather than the level of yields that unnerved markets.”

But then, just as suddenly, the storm blew itself out. March began with a resumption of the equities rally and an astonishing $23 billion of US investment-grade bond issuance on the first day of the month.

It is almost as if everyone in the markets now wants to pretend the great February bond rout never happened.

It would be unwise to relax, however.

“Volatility in rates has been a big focus for credit investors,” says William Weaver, head of EMEA debt capital markets at Citi banking, capital markets and advisory.

“Rates volatility has come in two phases this year: first with nominal rates rising, but real rates still anchored around -1%, which reflected hopes for a strong economic recovery.


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