A 6.5% fall in the Shanghai stock exchange on Thursday and a 16% one-day spike in the VIX earlier on in the week are but the two most recent examples of sudden, significant market movements that have caught people off guard.
Perhaps the best example, however, is the sharp compression and even sharper rise in German bund yields that shook markets a few weeks ago. Especially as there seems to have been little fundamental reason for the rise in yields, other than, perhaps, a recognition that they had clearly just fallen too much.
Indeed, some, like Invesco Perpetual CIO, Nick Mustoe, believe government bond yields are currently still too low, despite the QE programme that has, in effect, anchored them to record low levels.
“In his latest speech, ECB president Draghi said that the unconventional measures have been potent so far, that the QE programme will be implemented in full and that it will last until a sustained adjustment in inflation has occurred,” he said in a recent note.
What is interesting, however, is with government bonds getting all the attention of late as a result of the violent moves, an increasing number of bond investors are slowly turning again toward high yield – partly because the government bond movements have made them relatively more attractive.
In his latest commentary, Psigma CIO, Tomas Beckett said of US high yield: “It is currently hard to judge what the scenarios are that could materially damage the prospects for high yield. Maybe we should be concerned that the outlook is seemingly so relaxed!”
