The Bond Market Meltdown Continues: Where Are The Buyers For ‘Risk-Free’ Government Debt?

Sovereign debt is under pressure and it’s not clear who the marginal buyer is. Central banks are intervening to keep yields from exploding higher while they hike rates to fight inflation.

Relevant Past Articles 

• 9/23/22 - The Unfolding Sovereign Debt & Currency Crisis

• 9/7/22 - Europe: The Sovereign Debt Bubble Dominio 

• 7/12/22 - Brewing Emerging Market Debt Crisis

• 10/7/22 - Not Your Average Recession: Unwinding The Largest Financial Bubble In History

Looking For The Marginal Bond Buyer

Where are the bond buyers? As central banks around the world continue their attempts to wind down balance sheets, there is declining demand for sovereign debt everywhere you look. In fact, the Bank of England (BoE) was forced to buy more bonds this week, a continued expansion that is a clear sign that right now central banks have been (have to be) the only marginal buyer in the room. 

Every day we check sovereign debt yields; every day they are going higher. The only dynamics that have taken yields lower or kept them flat in the short term is the announcement of interventions from the BoE, BoJ and the ECB. So far, these efforts have shown to provide only temporary relief. We’re likely to see all “temporary” liquidity injections become more long-staying policies as larger-scale issues (like the insolvency risk to United Kingdom pension funds) come to the surface. Central banks still seem adamant on using rate hikes until inflation is much closer to their 2% targets, so we could easily see restrictive rates continue while at the same time see central banks abruptly purchase bonds as various liquidity crises arise. 

For example, the BoE is still expected to raise rates 75 to 100 basis points in their November meeting considering the rampant inflation in the U.K., risk of further currency devaluation, record-low unemployment and despite the latest bond market intervention. It’s a similar story that many countries and regions are now facing. Although it can change with the day — especially Thursday’s CPI data — the market is now pricing in an 88% chance of a 75 basis point hike for the Federal Reserve during the November meeting. Until inflation comes down further, central bank pivots look further away. 

The easiest way to see that the broader sovereign debt market is breaking or close to breaking is to look at the MOVE index, which tracks interest rate volatility across U.S. Treasuries. The MOVE index at current levels is extremely abnormal; these are unsustainable, volatile, panic-like levels for the market. Volatility can be a measure of market liquidity as prices whip around more than participants are comfortable with, which can limit normal buying and selling behavior. 

Realized volatility in U.K. government bonds is now even higher than for bitcoin. That said, bitcoin volatility is at one of its lowest historical levels (suggesting a big move coming) while bond volatility everywhere continues to rise. Created by Bitmex, BVOL is the rolling 30-day annualized volatility of bitcoin.