JPMorgan Sees Rising Risk of Bond Tantrum That Could Hit Stocks

(Bloomberg) -- There’s a significant risk of an abrupt sell-off in the bond market, which could also engulf stocks, according to JPMorgan Chase & Co.

A gradual increase in bond volatility, a deterioration in market liquidity and vulnerable investor positioning risk sparking a “bond tantrum,” given the low level of global yields, strategists including Nikolaos Panigirtzoglou wrote in a note Friday. The current environment brings back memories of episodes of sudden volatility spikes, such as the one seen in 2013, the year of the taper tantrum, they said.

The evidence “points to significant risk of an abrupt bond reversal going forward,” the JPMorgan team wrote. “Any abrupt selloff is unlikely to be favorable to equities given the support that equity markets received from the strong rally in bond markets in recent months.”

In one warning sign, the bank’s proprietary measure of Treasury futures market depth is showing signs of deteriorating liquidity. Meanwhile, a range of investors from hedge funds to so-called “real money” active bond fund managers are very long duration, suggesting their portfolios are increasingly sensitive to interest rates, they said.

Bond price swings are also “creeping higher,” the strategists noted.

Yields Tumble

Investor concerns about slowing global growth and expectations for an imminent easing in monetary policy from the world’s largest central banks has sent bond yields tumbling in many countries. The 10-year Treasury yield traded at a more than a two-year low of 1.95% on Thursday.

Still, Friday’s better-than-expected jobs data sent the benchmark yield up more than 8 basis points that day, as traders bet the figures cast doubt on the future pace of Federal Reserve rate cuts.

“The rise in bond volatility coupled with a still low level of government bond yields are raising questions about the risk of a bond tantrum from here,” the strategists wrote. “How vulnerable are government bond markets to a tantrum or value-at-risk shock similar to the ones we saw in May 2013, October 2014 and November 2016 in U.S. rates?”

To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Ravil Shirodkar

©2019 Bloomberg L.P.