Why 'extreme' volatility in bond markets could be a positive

ON BONDS

The extreme volatility seen from the sell-off in the bond and currency markets last month will be painful in the short term. But, looking further ahead, it will provide considerable opportunities for investors as many assets achieve more attractive valuation levels.

Any currency with either a commodity link or a high interest rate/carry component, with the latter a beneficiary of excess liquidity produced by the Fed, got annihilated in May and June. Those countries with significant current account deficits to finance, and hence those that are dependent on foreign financing, also performed very poorly in May and June. With the Fed removing excess liquidity, less cheap money is sloshing around the global system to finance current account deficits. With China’s government manufacturing a slowdown to improve the quality and sustainability of economic...