Key features of recent bond market exodus

Latest bond market sell offs have spooked investors leading to sharp drop in dollar and equities across world.

Key features of the latest rout -

Sell offs more acute in Euro zone -

• Sell offs are sharper across European sovereign bonds.
• After the announcement from Mario Draghi in January German 10 year bund by Mid-April was trading at a discount to Japanese counterpart, which has been fixed with bund enjoying premium of around 30 basis points as of now.
• This clearly suggests rout specific to Euro zone bonds.

It's a sovereign sell off -

• Chart from Markit economic show YTD return comparison among German sovereign, European Corporate and European high yield bonds.
• German bund's YTD return reached more than 4% as measured by iBoxx Germany and now it has moved to negative territory.
• Euro zone corporate bonds as measured by iBoxx corporate hit close to 2% by mid-April and now down slightly into negative territory. Moreover corporate spread has remained stable around 60 basis points (as measured by Markit Itraxx Europe) over German bund yield during sell offs.
• Markit iBoxx EUR contingent convertible measures return in high yield sector which as of now still returning about 4.7%, down from its Early April High around 6%.

Parallel sell offs no Euro zone crisis -

• Over the selloff French bonds remained quite stable and maintained yield premium of 20-30 basis points, suggesting parallel sell offs in European sovereigns.

Longer end shifted more -

• While German yields are still negative up to 4 years, shift has been more acute in higher end of the curve suggesting market is demanding higher premium to cover duration risk, possibly out of inflationary concerns.

So the question is what might be fuelling the rally in yields?

• Winding up of speculative positions over low liquidity environment might be fueling this massive selloffs.
• Sell offs are driven by subsiding deflationary fear and speculation over rise in inflation over the horizon.
• Rapid return in inflation might lead to purchase halt reduction of purchase by ECB.

European Central Bank's next policy meeting becomes of high importance and must watch for policymakers' reaction to this yield rise. Next ECB policy meeting is scheduled for 3^rd June.