August sell-off: No 'flight to safety' for bonds market

When stock markets tumble, bonds gain momentum and vice versa. But, this time it's a different picture. Contrary to market expectations, bonds market couldn't pick up when equities across the global market dropped in August.

This has resulted in many proven fund managers turning into big losers while leaving investors in more uncertainty about the future direction of the market. Hence, this time there's no 'flight to safety' for bonds market.

Analysts see several reasons for why bond market failed to get upward movement. The lack of certainty created by US Fed statements during the market downfall resorted to selling by hedge funds, expecting a rally in the bond market, etc. Adding to this, the currency crisis led by China and followed by other emerging economies further impacted bond market.

Central banks in China and emerging nations resorted to sell bonds in support of their currencies. The bond sales by Central banks to prevent currencies from further fall did the major damage to bonds market.

Stock market indices globally tanked last month more particularly during second half following the fears over China's economy slowdown, Greece turmoil and weaker Eurozone, dragon country currency Yuan devaluation, discouraging numbers from Chinese manufacturing sector, etc.

In the backdrop of all these adverse conditions, one can expect a very good inflow of funds into bonds and US treasuries. But, bonds market didn't receive any influx of safety bids.

The bond sales by central banks have weakened the correlation between equities and bonds markets. The during massive sell-off in the second half of August, S&P 500 index fell nine percent, US 10-yeear Treasury yields, contrary to moving inversely, fell marginally by 12 basis points. The debt of emerging economies mostly denominated in the US dollar.

The weaker currencies of emerging nations against the US dollar are also posing problems for central banks.

However, US treasury yields marginally rose during last two days of August as a small rebound recorded in high yield bonds. This pushed investors away from safe havens like treasuries.

Since buying interest was at low end, bond yields also drifted downwards. The lack of rally in US treasury market resulted in bleeding of hedge funds. For instance, Bridgewater Associates' All Weather Fund eased over four percent in August alone.

The hawkish signals from the US Fed prevented many to switch to safe havens like the bonds market. Market analysts strongly feel that the interest rate hike looks certain if not this month, maybe December.