Bond yields around the world have risen sharply over the last few weeks, sending bond prices sharply lower. Some now warn that if the move intensifies, the impact on global markets could be intense.
"This could be very dangerous," said Boris Schlossberg, managing director of FX strategy with BK Asset Management. The rise in bond prices and global drop in yields "was so absurd and so incredibly bubblicious that I think we could be in danger of having a melt-up in yields, just as you had a melt-up in prices. And that could actually be very dangerous to global markets around the world because at this point, it doesn't take much. A 1 percent increase in yields would be a massive move that could take a lot of people out of the market."
That is, those who have had bullish positions in bonds, particularly those who have used large amounts of leverage, can withstand little in the way of a rise in yields. They may receive margin calls, forcing them to sell other assets, which would mean that a continued bond drop could have "drive-by ramifications that markets may not anticipate," he said.
Bonds, then, could become the "pain trade" that drives all sorts of market movements in nonlinear ways, Schlossberg said.