The calm in global bond markets is probably due in large part to the decision of foreign exchange reserve managers to re-enter the market to buy US Treasury bonds. The yield on the benchmark 10-year US bond rose at the end of September. This coincided with the sharp decline in the size of US sovereign debt held by foreign central banks as shown in the Federal Reserve report, and the recent decline in yield coincided with a recovery in these positions. The sharp rise in yield also occurred soon after the Federal Reserve raised interest rates, and there are signs that the central bank may raise interest rates further in the future. Meanwhile, the French political turmoil intensified, leading to a sharp drop in the price of French treasury bonds. Investors who are generally not price sensitive have decided to reduce their positions, and the timing seems particularly bad, because just as they sell, another group of buyers just had good reason to buy at a lower price. This kind of market dynamic highlights that once a new shock occurs, or if foreign central banks simply reduce their holdings again, the US bond market is likely to experience greater volatility.

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