By David Thorpe
Central banks may have anticipated that by the time they came to do QT government budget deficits would be falling and so the issuance of new government bonds would be reducing, helping to ameliorate the impact of central banks selling their existing stocks.
Brian Kloss, portfolio manager on the fixed income team at Brandywine Global, is an advocate of this theory.
He says the volatility in the bond market caused by revised rate expectations was a feature of the first quarter of the year, but the most recent turmoil has, in his opinion, been the consequence of governments issuing extra bonds to fund deficits at the same time as central banks are selling bonds, while the professional investors are too concerned about the prospects for inflation to linger to buy the extra being issued.
Alberto Matellán, chief economist at MAPFRE Asset Management, says markets knew of the onset of QT and priced this in, but they only became aware of the revised inflation expectations around the end of August when the Federal Reserve dampened expectations around rate cuts.
Reversion to mean?
An element of normality may now be returning to bond markets, as the prices of long-dated government bonds have moved sharply upwards since the Hamas incursion into Israel and subsequent military actions, as investors seek a safe haven, though they remain higher than at the start of the third quarter.
David Thorpe is investment editor at FTAdviser