SOCGEN: 'Are We Facing A Bond Crash? Not Yet, But...'

Sam Ro | Jun. 10, 2013, 5:47 AM | 1,370 | Societe Generale

Recent moves in the US and Japanese bond markets have some people worried if interest rates are doomed to surge.

The consensus certainly seems to think so.

Goldman Sachs' Francesco Garzarelli has warned clients that the bond sell is "for real" with 10-year Treasury yields likely to head to 2.5% later this year.

In a note to clients this morning, Societe Generale's Patrick Legland reminds clients that their analysts expect the 10-year Treasury surging to 2.75% by the end of the year.

Legland communicated this in a note titled "Are We Facing A Bond Crash? Not Yet, But..."

In the note, he discuss the risk of a disorderly bond market sell-off. Here's the "but" explained:

More volatility: a worrying sign
The recent rise in bond volatility is clearly a worrying sign, but we are still far from the volatility peaks which occurred in the past five years following the Lehman debacle and the euro sovereign debt crisis. However, the sharp rise in Japanese yields reminds us that there is still an anomaly that should be corrected in the next few years. The key question remains whether the BoJ will succeed in its policy and be able to maintain rates at low levels medium term. If not, then the bond bubble could burst rapidly, with dire consequences for financial markets. The evolution of bond volatility in Japan and the US should therefore be watched closely for any signs of panic. For the moment, we do not see indications of an imminent bond crash, but volatility will remain high until we understand better how the Fed exit will be implemented.

So, the risk of a bond crash is not imminent, but certainly on the table.

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