Global bond collapse raises potential for VaR shock – News Couple

Global bond collapse raises potential for VaR shock

LONDON (Reuters) – Global short-term government bonds continued a big selloff on Thursday as two-year debt yields approached their biggest rise in years, stoking investor concerns and raising concerns about the impact of such big moves on leveraged portfolios.

Traders noted that the overnight Australian bank yield rise was the biggest change in three days since 1996, and the Canadian debt yield rise was the biggest move since 2009.

The moves even extended to the hyper-liquid US bond markets, where US 2-year Treasury yields posted their biggest rise in two days since the pandemic-fuelled sell-off in March 2020. German two-year bond yields hit a 15-month high.

George Saravelos, strategist at Deutsche Bank said in a note to clients.

VaR shock is essentially a jump in the maximum loss an investment can sustain over a period of time.

Dealing desks allocate budgets based on the historical ranges in which the assets are trading spanning a few years. But if prices fall as quickly as they have this week, investors will have to loosen their positions to prevent deeper losses.

“This is the closest we can get to a faltering market,” he said.

While these moves usually affect other asset classes such as currencies and stocks, traders said moves relatively contained in long-term debt eased selling in other markets.

A measure of currency market volatility has remained well below the three-month high hit earlier this month while the stock market index has settled near its 2021 lows.

Stuart Cole, a macroeconomist, said: “One of the things that stops yields affecting currency markets to the same degree as traditional is that expectations about final interest rates remain low, so longer-term instruments show less sensitivity to short-term moves than usual.” . Ecoti at Equiti Capital.

While investors have generally less weight in bonds this year betting on a broad economic recovery after the COVID-19 pandemic, weekly situation data from the Commodity Futures Trading Commission (CFTC) shows short positions in 2- and 5-year US Treasury debt are lower than in 2021. Extremes, suggesting an extended sell-off could hurt hedge fund portfolios. (Reporting by Saykat Chatterjee and Abinav Ramnarayan; Editing by Francis Kerry)

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