A delusional market continues to take on risk while volatility spikes in bond markets A delusional market continues to take on risk while volatility spikes in bond markets A delusional market continues to take on risk while volatility spikes in bond markets

A delusional market continues to take on risk while volatility spikes in bond markets

Picture of Althea Spinozzi
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  The Move Index broke above levels seen during the 2013 taper tantrum, and it's at the highest level since the Covid pandemic. Yet, the market remains complacent with risk. We believe that high inflation and central banks' monetary policies will pressure the credit space, resulting in a tantrum.

There is still an appetite for risky assets.

It doesn't matter if volatility rises to the highest level since the Covid pandemic or if inflation becomes a bigger problem by the day; appetite for risky assets remains underpinned.

Yesterday, Bell Ring Brands sold high-yield bonds with a 10-year maturity at 7%. That's the same level as guidance before the war in Ukraine started and before the company was forced to withdraw the deal from markets due to high volatility. BellRing Brands was the first high yield deal to be priced in the primary junk space since Twitter sold $1 billion worth of bonds on February 23rd, a two-week hiatus.

While it is normal to see the appetite for risky assets strengthening as spreads widen, the quietness in credit markets is becoming eerie.

Source: Bloomberg and Saxo Group.

Inflation and central banks' monetary policies might be a brutal wake-up call for investors.

As the conflict in Ukraine intensifies, markets are forced to reconsider growth forecasts. Yet, to prompt the need to pare back interest rate hikes is not only the uncertain macroeconomic outlook but the much less hawkish statements of central banks officials.

Yesterday, money markets pushed back on ECB rate hikes for this year, pricing the first hike in March 2023. It provoked a considerable rally in European sovereign bonds, especially in the periphery, where we saw the BTP-Bund spread falling below 150bps. However, today's rate hike bets reverted as the Eurozone CPI figures for February beat expectations hitting a new record high. Markets returned to consider two rate hikes by December. However, volatility and uncertainty remain incredibly high, meaning that the tightening outlook can change every time unless the ECB outline a clear path towards normalization.

Gilt yields dropped the most in the UK since the 2016 referendum on Brexit as the market went from pricing more than six rate hikes by December to less than five. In the US, expectations for the terminal rate fell to 1.7%, while the Federal Reserve's long-term estimate is at 2.5%.

We are in front of a market that continuously rebalances expectations depending on growth and inflation. However, the freeze of assets under the Russian central bank might be playing a considerable role in adding volatility to bond markets.

We expect central banks to keep focused on inflation, which is becoming a systematic problem that will require tighter monetary policies sooner or later. The later central banks begin to react, the more aggressive they will need to be, causing even more market volatility. That is going to be a wake-up call for investors, especially for those who continue to take on risk or buy the dip, hoping that central banks will rescue them in the long term.

Reinforcing the idea that inflation has become a systematic risk, real yields plunged into deeply negative territory. Ten-year TIPS yields broke their 200 days moving average at -0.92% to recover some of the losses later in the day. The move has been driven by dropping nominal yields and rising breakeven rates. Real yields are telling us that investors are afraid the Federal Reserve will not contain inflation with a moderate pace of rate hikes.

Source: Bloomberg and Saxo Group.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.