A historic rally in the bond market

We have not observed such events for a long time, because there have been no such high interest rates for a long time and no change in attitudes as to their direction in the future, even despite still high inflation.

Crazy in the bond market

Today, investors forgot about the rise in prices and rushed to government treasury papers as if for a lifeline, leaving European bank shares in particular. Other sectors are also hit by a ricochet, as financial institutions and investors may have come to the conclusion that we are dealing with an imminent peak of increases or with a pause in interest rate increases.

Bond yields may have been tempting investors for a long time, but they could still hold off on buying because interest rates were still thought to be higher, so yields and bonds could be bought even cheaper.

Recent events may have convinced investors that the end of rate hikes is near and now is the right time go into bonds. However, this process is not spread over time, but resembles a run on the bank. All at once.

Only today the price of German Bunds increased by 2,5 percent, the price of 2-year bonds increased by 1 percent, which is a record and historic result in recent years. In the United States, the price of 30-year securities rose by 2,6 percent. Translating this into yields: US 10y drop from over 4%. up to 3,45 percent 10l Germany: down from 2,78 to 2,20%, 10l UK: down from 3,92 to 3,30%.

US bonds and inflation

It is worth adding to all this that at the end of January financial investors on the US bond futures market had record short positions. They expected prices to fall further as interest rates rose and wanted to make money by selling contracts. Currently, their record positions are in jeopardy, which could result in massive repurchase coverage of these trades, which could drive demand even further.

What about the fight then? inflation? Nobody cares about this for now and instead of higher interest rates for longer, higher inflation may wait for longer. Only a great recession will solve two problems - too high interest rates and too high inflation... There is still hope that the market has overreacted with today's demand for bonds and soon the situation will start to normalize.

In Europe, the decision will be crucial EBC on interest rates on Thursday and Christine Lagarde's statements on bank panic and bond euphoria. Earlier, however, investors will get to know US inflation data on Tuesday. If it falls fast, there may be additional demand for bonds. On the other hand, if disinflation is not continued, the market, especially the stock market, could be in even greater trouble.