Quantitative easing: Implications for bond market volatility

Abstract

Macro-economic crisis management has undergone a remarkable evolution since the 2008 credit crisis, with central banks playing an increasingly activist role. Consequently, and in a globally coordinated way, traditional monetary policy norms have been set aside in favour of unorthodox balance-sheet measures of very significant proportions. The impact on sovereign bond markets has led to anomalously low long-term yields as this activism is systematically suppressing risk premia. The potential for future bond market volatility should central banks step back their bond buying programmes is a major risk management issue facing financial institutions.