Near the end of January, UBS (UBS) ask The most important question for the global market is: “The bond bears wake up from hibernation, but is it too early?”

Hibernation may not be the correct word. Strong demand and declining benchmark interest rates mean that the yields of US government bonds, which are the center of the market, have been steadily declining for nearly 40 years. Therefore, rather than waking up from a winter nap, it is better to say that it is a resurrected undead.

In any case, about six months later, investors seem to think that this is indeed too early. The big bond volatility in 2021 is shocking-the benchmark 10-year U.S. government bond yield soared to 1.77% at the end of March, compared with the first quarter The darkest Four years for the market. However, there was a sudden reflection this week, and the yield was as low as 1.25%, which was still much higher than this year’s starting point, but there was a serious decline.

It is worth revisiting some of the origins and key moments of the bond shock.

Their safety and stability mean that government bonds like pain (among other things). Therefore, when the news about the vaccine launch at the end of last year first shrouded the tempting prospects of returning to normal life after the pandemic, it dragged them down.

However, the real blow comes from the specter of inflation, which is the real kryptonite in the market because it erodes the fixed bond rate of return. The Democrats succeeded in controlling the U.S. Senate after their victory in Georgia in early January, which ignited expectations of excess fiscal spending. Sustained soaring growth, sustained financial support, and the Fed’s blindness to rising price pressures have formed a strong and recognized wisdom.

“The story in January is a pie in the sky, rainbows and fairy dust,” said James Athey, investment manager of asset management company abrdn. Changed the name inexplicably This week from Aberdeen Standard Investments. (For anyone who wants to know, it’s pronounced “Aberdeen”. I don’t understand either.)

In this environment, the instability of the US seven-year Treasury auction in February—usually a monotonous event that would only appeal to purists—eventually triggered a sharp decline. The 10-year Treasury bond yield closed up about 0.14 percentage points on the day, which is a huge change by the standards of the usually quiet US market.

This reminds us that although US government bonds are the cornerstone of the global market and support the prices of almost all riskier asset classes in the world, they are also facing moments of instability. When the Fed more forcefully retracts its generosity, this fault line may be tested.

Even Steven Major, head of bond research at HSBC and one of the most famous and optimistic voices on the street, Say In February, he was “eating humble pies.” Around that time, Major raised his year-end forecast for 10-year Treasury yields by 25 percentage points.

However, as Athey pointed out, investors are now shrinking some more generous expectations of fiscal spending. Inflation rates have risen sharply, but investors are becoming more and more confident, most of which seem to be rooted in the inevitable bottlenecks in the fast-moving blockade economy. Crucially, the Fed has reinforced the message that the more accommodative attitude towards price increases in the post-crisis recovery does not mean that it has completely abandoned its inflation target task. Interest rate setters say that the rise in policy interest rates may be earlier than they had previously expected.

As a result, the 10-year Treasury bond yield fell by 0.19 percentage points to its lowest point last week, despite a slight rebound on Friday.

The mystery here is exactly what triggered people to return to the bond market. Some hypothetical root causes have lasted for several weeks, but the effect is very limited.

Perhaps the most popular explanation is positioning: investor consensus has become so strong and Deflationary trade So popular. When this position began to collapse, the resulting bond price increase shocked investors who were still short. These types of squeezing can quickly reinforce themselves.

Major insisted on a 10-year yield target of 1% before the end of the year, but he was not convinced. “Positioning is rationalization after the fact,” he said. “It’s a bit bankrupt intellectually.”

But he suggested that investors should reconsider the real drivers of demand for government bonds, even during large-scale issuances. “You can even convert them into cash without changing the price. This is real liquidity,” he said. “Can your house do it? Can you do it with encryption?”

So what’s next? Naturally, the market needs two aspects.UBS Wealth Management said this week that it still expects this year’s yield to reach 2%, and BlackRock Investment Research Institute also said avoid On the basis of government bonds, low yields provide little cushion to compensate for shocks elsewhere in the portfolio.

Major also believes that the rebound in bond prices has basically ended for the time being. But he added: “We will not be short, and we have not changed our forecast. We still have half a year.”

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