Central bank action propels bond market crash worries

Investors are back in thrall to global central banks.

A shift in communication from policymakers in the eurozone and UK has prompted money managers to raise concerns about the threat to bond markets from any central bank missteps.

Just under half of investors surveyed by Bank of America Merrill Lynch (48 per cent) think global monetary policy has become “too stimulative” for a brightening world economy – the highest proportion since April 2011.

The shift in investor sentiment towards low interest rates across the developed world comes after the European Central Bank has begun tentative shifts in its communication over its stimulus measures.

European markets were roiled at the end of June after Mario Draghi, ECB president, hinted at a change at the central bank’s bond buying scheme which has been running since March 2015. The eurozone’s broad-based recovery and steadily falling unemployment has surprised observers this year, even if inflationary pressures have remained subdued.

Germany’s 10-year Bund yield has more than doubled in the last month on the back of tapering concerns, from 0.25 per cent to 0.6 per cent in the last three weeks. Markets will be scrutinising the ECB’s latest message at its governing council meeting tomorrow.

BAML’s survey found a bond market crash was top of the “tail risk” of concerns for money managers, with 28 per cent saying they most feared a correction in the bull market that has taken hold since the global financial crisis.

Bond yields, which move inversely to prices, rise on the prospect of tighter monetary policy through higher interest rates or a scaling back in quantitative easing measures.

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Underscoring concerns about the next steps for central banks, a policy “mistake” by the Federal Reserve or the ECB was the second most cited risk at 27 per cent.

The US Fed has raised rates twice since the financial crisis and announced measures to shrink its balance sheet this summer, accelerating the reversal of emergency measures put in place nearly a decade ago.

“Too many investors see the Fed as a likely negative catalyst”, said Michael Harnett, chief investment strategist at BAML.

The survey was carried out with 207 money managers with $586bn with assets under management.

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