Are we seeing Jekyll and Hyde in the bond markets? Until recently, the return index of German 10 year Bunds had been in an almost linear uptrend with very little volatility. Yet low observed volatility can hide the fact that due to ever more expensive valuations, the intrinsic risk becomes high. It is as if risk were somnolent but could wake up any moment.

This is what happened in recent weeks in the Eurozone causing a performance of Bunds completely out of line with recent experience. Amazingly, the decline of the bond index was not dissimilar from price corrections we have seen time and again in European equities, generally and logically considered a riskier asset class.

cumulative performance of European equities and german bunds