Creeping bond yields in Europe infected the U.S. Treasury markets this week, sparking a global selloff in equities, but one analyst has warned that this could simply be a "dress rehearsal" for future chaos for fixed income assets.
Analysts have given several reasons for the global selloff in bond markets, including central bank activity and increased inflation expectations due to the rise in oil prices. However, for Jim Reid, head of global fundamental credit strategy at Deutsche Bank, it's liquidity – how easy it is for traders to buy and sell assets without affecting their price – which has been key.
"What most traders have said is that liquidity is awful. Big moves are possible on relatively low or average volumes." Reid said in a note on Tuesday morning.
"I can't help thinking that when the next downturn hits, the lack of liquidity in various markets is going to be chaotic. These increasingly regular liquidity issues we're seeing might be a mild dress rehearsal."
A lack of liquidity has many market participants fretting that they could easily get caught on the wrong side of a hefty move in a fixed income asset.
He highlighted that additional money in the system – from quantitative easing – combined with low trading liquidity -- due to increased banking regulations – was creating air pockets, which can burst.