Reverse speed

RARELY can a market have changed direction with such speed. For most of 2015 European government-bond yields had been heading lower, with the German ten-year yield on a seemingly inexorable path towards zero. Shorter-term German bonds were already offering negative rates, meaning that investors who held the debt to maturity were bound to lose money.

Then, in the middle of April, the markets turned and yields started rising again (which means that bond prices fell). Germany’s ten-year yield is now back where it was at the start of the year. The sell-off has driven yields in the rest of Europe higher as well (see chart).

Higher bond yields would be good news if they were prompted by a sudden improvement in economic data. That might make investors more confident about owning equities, and less keen on the safety of government bonds. But there has been no great pick-up in the economic outlook of late. Analysts at Royal Bank of Canada have thus dubbed this “the wrong kind of sell-off”.

The reversal seems to be the result of a number of interconnected factors. At the start of 2015, yields were falling because of...

from The Economist: Finance and economics http://ift.tt/1IkThau