Return of the bear?

The collapse in bond prices since mid-June culminated early last month in the biggest blowout in swap spreads since the LTCM crisis. Though rumours of losses abounded, the fallout for dealers and investors may not be as serious as initially thought.

A bull run in US bonds that has lasted more than two decades may have ended on June 13. That was the day yields on US Treasuries began ratcheting back up off their 40-year lows. The sell-off in the US Treasury market in the weeks that followed caused mortgage investors to worry that the pace of mortgage refinancings would drop – extending the expected duration of their portfolios – and so triggered the one reaction bond investors feared most and understood least: mortgage investor selling.

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