In this economic update video for eZonomics, ING head of macro and consumer economics Maarten Leen explains how sharp rises in government bond yields are challenging the view of bonds as “dull” investments.
Prices fall 8%
Leen says the yield on 10-year German government bonds rose from a record low of just seven basis points mid-April to almost 1% in early June. That is equivalent to a fall in prices of around 8%.
“When interest rates rise, the price of bonds falls,” he notes.
Leen says these conditions are rare in developed markets.
“Even European Central Bank president Mario Draghi said people who own bonds should get used to volatility,” he says.
Leen explains there are concerns about market liquidity, a flat economic recovery in the Eurozone, and an uncertain situation in Greece.
Leen says the question is whether the US Federal Reserve will increase official interest rates this year.
There are other factors too – such as inflation in the Eurozone. Will it rise or fall back?
What all this means, he says, is that bond yields are likely to remain volatile in the months to come.
“You may like that or not, but in any case it is not dull.”