He said recent volatility in government bonds is a ‘medium-term risk’ for financial markets and it would not take much for policy makers to find themselves ‘behind the curve.’
Mustoe pointed to Europe as an example of the precarious nature of bond markets at the moment.
“European bond markets in particular have seen yields bounce decisively off low levels,” he said. “The 10-year German bund yield, which fell as low as 5 basis points in mid-April, has moved as high as 78 basis points in recent weeks. Meanwhile, the price of the 30 year bund, issued at par last spring, and which subsequently traded as high as 160, is now at 130 having retraced all of this year’s gains. It is hard to attach any fundamental explanation to the rise in yields.”
Mustoe also warned investors that the US Federal Reserve could deliver a ‘hawkish surprise’ by raising rates sooner than most expect.
