Tuesday, September 27, 2011

Bond market roller-coaster

It's a rare event to see 30-yr T-bond yields moving up by 37 bps in the space of the three trading sessions, especially after they plunged almost 50 bps in the previous three trading sessions (see above chart). The change in yield equates to a 9% price rise, followed by a 6.2% price decline. This sort of volatility is a good measure of the market's deep-seated fear that a Greek default will set off another global tsunami of bank failures and a sickening global economic free-fall such as we saw in 2008. After all, 30-yr bond yields only move dramatically when the long-term outlook changes dramatically.

To put this into better context, the plunge in 30-yr yields during the past two months has been just about as dramatic as the unprecedented plunge in bond yields that occurred at the end of 2008, when markets were braced for a global financial market collapse that would translate into a multi-year global depression. Markets were just a tad too pessimistic back then, and I think we will see that today's pessimism is overdone as well. The bond market yield roller coaster ride is not over yet, and could prove pretty exciting for T-bond bears in the months to come if Greece manages anything short of an ugly default.

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