Some say the current bond sell-off is market irrationality but with debt levels at such high levels, there is nothing irrational about reducing debt exposure especially if there is more talk about bondholders having to pay a price for failures. If anything, the idea that there is no principal risk in the US or in the EU is irrational. Simply put, bond vigilantes have returned and the world may be a better place.
There is a confidence contagion in bond markets. This is from the retail side of the business as well as institution. If there is the belief that budget problems cannot be solved and the monetary authority does not have the people’s confidence to control prices, there will be less confidence in holding bonds. However, cash is not king at current levels. The problem is that investors will seek other risks which may be greater or more direct. Firm risk is more likely to be subject to market forces unlike government debt which can take-on many different alternative solutions.
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