Quarterly Outlook – Q3 2015 – Volatile Rates A Sign of Normalization or Danger? We are pleased to present our Macroeconomic Quarterly Outlook, a publication jointly authored by Roubini Global Economics and ETF Securities Research.
Volatile Rates: A Sign of Normalization or Danger?
Government bond markets were rocked by the April-May sell-off of German bunds, which resumed in early June. This reflected a healthy realignment of yields to economic reality and market conditions. Looking forward, volatility should remain suppressed by quantitative easing (QE), but bouts of panic are likely.
The European Central Bank (ECB) began QE as announced, but the conditions associated with the program were somewhat stronger than expected. This resulted in a continuation of the momentum trade until mid-April, when a reversal began, sparking a rapid jump in G4 yields, with the largest bout of volatility seen in long-term bunds. However, much higher rates would be inconsistent with the weak global growth and very gradual Federal Reserve policy-rate hikes that we expect.
Short-term yields, which are more reflective of monetary policy expectations, were little changed. Thus, the government-bond roller coaster that buzzed through the U.S. in Q1 put in a repeat performance, with Europe experiencing the largest dive. None of these sell-offs, however, were large compared with those seen in 2013 with the ”taper tantrum” and many previous episodes.
Equity markets, meanwhile, have shown resilience, but have also been a bit choppy. This is mainly caused by the tight link between the euro and 10y bund yields, which both have a strong impact on European equities. After sharp spikes in volatility in late 2014 and early 2015, developed-market equities have mostly rebounded and many emerging-market equities have also rebounded from earlier sell-offs.
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”). ETFS UK is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).