He says those operating within that usual time horizon would be expecting a recession to already be a reality in the US and UK, and were positioned for such.
A recession of that kind would typically be expected to hasten the falls in inflation already seen in the economy and to rate cuts.
Jones says when the recession did not arrive, and so investors began to expect inflation to remain high, there was a scramble to sell longer dated bonds, which are more vulnerable to higher inflation, and buy shorter dated bonds, which offer more protection against inflation but are vulnerable to economic growth shocks.
David Lewis, an investment manager in the Merlin multi-manager fund range at Jupiter, says he has owned shorter dated bonds of late simply because he considered them to be cheaper than their longer dated equivalents.
Jones is another investor who was in shorter dated bonds and so has benefitted from recent market events.
He says his rationale for this was his belief that while a recession may come, his view is the data indicated it will not be before late 2024, and in such a scenario, he felt shorter dated bonds represented better value.
Supply and demand
The other theory as to why US Treasury bonds sold off so starkly relates to supply and demand dynamics in markets, and the other side of central banks' policy responses to higher inflation.
During the global financial crisis, central banks instigated a policy known as quantitative easing, whereby they created money to buy government bonds.
The economic aim was to provide liquidity to the financial system, fund the deficits governments had built up in dealing with the crisis, and keep bond yields low, which encouraged capital into riskier assets and arguably fermented the sharp rises in UK property and equity prices even as economic growth was anaemic.
A further bout of QE was deployed at the start of the pandemic, but the onset of inflation in the general economy since then has prompted central banks to embark on a policy of quantitative tightening, which reverses QE by selling bonds into the marketplace, causing their prices to fall, and negatively impacting the valuations of riskier assets.
Central banks may have anticipated that by the time they came to do QT government budget deficits would be falling and so the issuance of new government bonds would be reducing, helping to ameliorate the impact of central banks selling their existing stocks.
Brian Kloss, portfolio manager on the fixed income team at Brandywine Global, is an advocate of this theory.
He says the volatility in the bond market caused by revised rate expectations was a feature of the first quarter of the year, but the most recent turmoil has, in his opinion, been the consequence of governments issuing extra bonds to fund deficits at the same time as central banks are selling bonds, while the professional investors are too concerned about the prospects for inflation to linger to buy the extra being issued.
