More than $450 billion has been wiped out across global bond markets in the past few weeks and, for many people, there doesn't seem to be any particular reason why.

Sovereign-bonds yields had fallen so far that in order for them to make sense, investors would have needed to see persistent deflation and European recessions. For a while, that seemed like a real possibility, as oil went from more than $100 a barrel to less than $50 and many forecasters were predicting $30. Well, that didn't happen, and oil started to rise at the same time as evidence of incipient inflation and economic growth in Europe.

That sparked speculation -- proven to be unfounded -- that the European Central Bank could even end its bond-buying program early. Against that backdrop, holding bonds with yields close to zero made little sense, causing investors to unwind one of the most crowded trades in all of markets. So, next time someone says "we don't really know," don't buy it. Here are a few reasons that explain why.

David Fuller's view

No disrespect to Nick Gartside of JPMorgan who is interviewed in Bloomberg’s Audio at the beginning of this article above, and asked if the bond market bubble has burst?  He replies: “It’s a correction, not a reversal in bonds.” 

How does he know this?  He may feel the odds are still on his side because that answer would have been correct on every other setback in bonds during the last 35 years.  However, with signs that the global economy may now be responding to stimulus efforts from central banks, notably in the EU, and with the US Federal Reserve hoping to lift rates in September, the exceptionally low yields seen earlier this year is a risky background.

A more objective answer to the question above would be, and I am quoting Eoin on this: “So far, it is a correction…”  Personally, I question whether CIOs of fixed income departments are the best people to ask if the bond bull market, probably the best in history, is ending or over.  No one knows for certain but they will understandably have more conflicting emotions on this subject. 

Meanwhile, we can look at the latest technical evidence, from two perspectives, to help you decide what you think.

Here is a sample of 10-year government yields, shown on charts from the Bond Yields section of the Chart Library, and since there have been plenty of previous rallies, note the low yields reached before the current recovery commenced: German Bunds, French Bonds, Netherlands Bonds, Swiss Bonds, UK Bonds, Japanese Bonds, Canadian Bonds and US Treasuries. 

OK, how do they look to you?  You may conclude that this year’s rallies are nothing special relative to what has occurred before, and you would be partially right.  In fact, most of the rallies in 2013 were considerably larger, at least in nominal terms.  Therefore, let us now look at them on semi-logarithmic scales, over the same 5-year time period: Germany, France, Netherlands, Switzerland (I am unable to recreate this in semi-log for some reason), United Kingdom, Japan, Canada and United States.

Most of the semi-log charts look quite different, don’t they?  This is particularly true for the EU yields, where you see big, climactic downward accelerations, followed by significant rallies.  To maintain my objectivity, I will point out that this does not guarantee anything.  Nevertheless, where the biggest bond market rally of our lifetime drives yields to record lows, followed by even more dramatic rallies in a number of instances, I cannot describe this as just another correction.  The probability that we are looking at the end of bond bull market (falling yields) has increased.